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Before most house hunters can close the deal, they need to qualify for a mortgage. Learning how to apply for a mortgage in advance — and breaking the process down into digestible steps — can help applicants feel better prepared and avoid any unpleasant surprises during the process. (Good news: The mortgage application process is one of those things that is more complicated to explain than to experience!)

Ready to learn how to apply for a home loan? Here are the nine steps in the mortgage process, including moves you can make that may expedite your approval.

1. Estimate Your Budget

Before any mortgage application, your first step should be figuring out how much house you can afford. Being realistic about your budget — factoring in income, debts, monthly spending, down payment savings, and more — can keep you from shopping outside your budget.

Certain budgeting guidelines can help you determine what kind of monthly mortgage payment you can afford. You’ll also want to figure in homeowners insurance, property taxes, and (possibly) private mortgage insurance, or PMI. Some popular methods for calculating your mortgage budget include:

•   The 28% rule: No more than 28% of your gross monthly income should go to a mortgage payment.

•   The 35% / 45% guideline: Your total monthly debt should be no more than 35% of your pre-tax income or 45% of your post-tax income.

When calculating your budget, don’t forget the down payment. A higher down payment can yield a lower monthly payment — and putting down 20% or more could help you avoid PMI — but don’t drain your savings for a down payment. You want to have savings on hand should you need to cover emergency home repair costs down the line.

💡 Quick Tip: SoFi Home Loans are available with flexible term options and down payments as low as 3%.*

2. Choose a Mortgage Type and Term

There are many different mortgage types, and choosing one will depend on your income, down payment, location, financial approach, and lifestyle.

Note: SoFi does not offer USDA loans at this time. However, SoFi does offer FHA, VA, and conventional loan options.

Some choices you’ll need to make at this stage of the mortgage process are:

•   A conventional home loan or government-insured loan (FHA loan, USDA loan, or VA loan)

•   A fixed-rate or adjustable-rate mortgage

•   Your repayment term: typically 15, 20, or 30 years

•   A conforming or nonconforming loan (such as a jumbo loan)

•   If you should opt for an interest-only mortgage

A good lender will walk you through your options, whether it’s a HUD home requiring an FHA mortgage or a high-priced home with a jumbo loan.

3. Get Preapproved

At this stage in the mortgage application process, you can shop around for multiple mortgage lenders and even get prequalified. Look for lenders that not only offer you a great rate but that are also willing to help you navigate the mortgage process. Here are a few questions to ask a lender to narrow down your list.

Found the perfect lender? Then it’s time to get preapproved. During the mortgage preapproval process, you’ll complete a full mortgage application. The lender will perform a hard credit inquiry and issue a letter confirming your ability to borrow a certain amount of money.

In general, the better your credit score, the better the mortgage rate you’ll be approved for. If your score is above 740, you’ll qualify for the best rates. But in general, you’ll need a minimum 620 credit score to buy a house.

A preapproval letter, usually good for up to 90 days, can improve your odds of winning over a seller in a bidding war. In competitive markets, having a preapproval letter may even be a requirement.

Getting preapproved requires some work on your part. You’ll need to furnish the lender with proof that you can afford the mortgage, which typically includes the following documents:

•   Bank statements

•   Paystubs

•   Tax returns

•   W-2s

•   Retirement account statements

•   Gift letter (if you received help from a family member to fund your down payment)

•   Identification

Mortgage lenders prefer borrowers who have stable, predictable incomes. A steady employment history signals to the lender that you have regular income coming in to make the monthly payments of a mortgage. That’s why it’s easier to get approval as a W-2 employee than as a self-employed worker.

In general, lenders like to see two years of employment on a loan application. Self-employed individuals will submit two years of tax returns.

Recommended: What’s the Difference Between a Hard and Soft Credit Inquiry?

4.Find a Property and Make an Offer

Your real estate agent will guide you through the process of finding a property and making an offer on a house. The offer is typically written by the buyer’s agent on a standardized form.

Only make offers on properties that fall within the amount you’ve been preapproved for. Otherwise, the lender will need to re-process your full application again. If you don’t qualify for the new, larger amount, you may not be able to secure any loan on the property.

Your offer will typically include earnest money — a good-faith deposit you’re making on the house. It’s usually 1% to 3% of the offer price, and it’s meant to make your offer more attractive to the buyer.

If your offer is accepted, you’ll send the signed paperwork to your lender.

5. Submit a Mortgage Application

Lenders are required to do a second credit check before final mortgage loan approval and will likely ask for further documentation. If you’ve opened a new account, changed jobs, or made a major purchase since preapproval, those actions will have to be vetted.

Responding quickly to your lender’s requests for documentation can help keep your application on track. Your lender likely has most of the required forms from your preapproval application, but in general, you’ll need:

•   Documentation of income: W-2s or 1099s, profit-and-loss statements if self-employed, paystubs, Social Security and retirement account info, information on alimony and child support, etc.

•   Documentation of assets: Bank accounts, real estate, investment accounts, gifted funds, etc.

•   Documentation of debts: Any current mortgage if you own a home, car loans, credit cards, student loans, etc.

•   Information on property: Street address, sale price, property size, property taxes, etc.

•   Employment documentation: Current employer information, salary information, position/title, length of time at employer, etc.

💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.

6. Be Patient and Avoid New Debt

The average time between submitting a mortgage application and closing is 50 days. During this period, it’s wise to observe a self-imposed “credit freeze.” That is, don’t run up your credit cards beyond what you usually spend each month. Put off major purchases. Don’t apply for new credit cards, auto loans, or take on any other new debt. And, of course, make sure to pay all your bills on time.

If there’s any significant change in your credit history, your closing may be delayed or even derailed. Should something major come up (like an expensive medical emergency), call your lender to let them know.

It can be tough feeling like your life is on hold while you’re waiting for your mortgage application to be processed. Try to be patient and just let the process play out. Now is a good time to reach out to friends and family who have been through the mortgage loan process before and commiserate. Consider this your orientation into the homeownership club.

Recommended: What’s a Mortgage Commitment Letter?

7. Get a Home Inspection

Home inspections may not be required — but they’re a crucial part of the mortgage loan process. Hire an inspector (your real estate agent may have recommendations, but you can shop around) to thoroughly check the property inside and out for undisclosed problems. If the inspector uncovers expensive issues, you may negotiate for a price reduction or back out of the deal without penalty.

Inspectors will look for a wide range of issues, but some inspectors are more thorough than others. Review this home inspection checklist to make sure your inspector will cover all the bases. In some cases, a general home inspector may find an issue that requires a more specific expert to take a look (and yes, that’ll cost more money — but it may be worth the cost).

Don’t let the infatuation with your dream home blind you. If there are serious issues that come up during the inspection and the sellers won’t budge on price (or agree to fix them before closing), seriously consider walking away. You won’t recoup the money you paid for the inspection — a home inspection costs between $300 and $500 — but if it keeps you from investing in a money pit, it’s money well spent.

8. Go Through the Mortgage Underwriting Process

A major part of mortgage loan processing is the underwriting process. But what is underwriting? The underwriting process begins after you complete your mortgage application and ends after all the documentation has been completed and includes the appraisal. During this process, the underwriter examines the borrower’s financials, as well as the appraisal, title search, and proof of homeowners insurance.

An appraisal is an independent property evaluation of a home’s value. It will describe the home and what makes it valuable. Factors that affect the appraisal value include the location, condition, amenities and features, and market conditions in the area.

A lender requires a home appraisal to ensure that it isn’t lending more than the property is worth. If the appraisal comes in too low, the lender won’t lend extra money to cover the gap. Buyers will need to cover the difference with their own money or renegotiate the price with the seller to match the appraisal.

Once the appraisal is complete and all documentation has been reviewed and verified, the underwriter will recommend approval, denial, or pending. A pending decision is given when information is incomplete. You may still be able to get the loan by providing the documentation asked for.

After underwriting approval with a “clear to close,” you’re set to close on your loan.

Recommended: Local Housing Market Trends

9. Close on Your New Home

Closing day is when all parties sign the final documents, and ownership is legally transferred from the sellers.

In the days prior to your close, the lender should provide a final list of closing costs. Closing costs are typically 3% to 6% of the mortgage principal and consist of:

•   Lender fees

•   Appraisal and survey fees

•   Title service

•   Recording fees

•   Home warranty costs

•   First year’s premium of PMI

You can pay closing costs by wire transfer a day or two before, or by cashier’s check or certified check the day of closing.

Before arriving at closing, however, you’ll want to do a final walk-through of the property. During this walk-through, confirm that the sellers have made all the repairs agreed to — and that the buyers haven’t removed anything, like appliances, that were meant to be left, per the purchase agreement.

In the past, buyers and sellers, their agents, and lawyers would gather in the same room to sign the paperwork at closing. In recent years, remote online closings have become more common.

The Takeaway

Applying for and securing a home mortgage loan follows a simple process that can seem complicated the first time you do it. But if you reply to questions promptly and are organized with your documents, it’s actually pretty simple — even if it does involve a little waiting time.

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

FAQ

What are the first steps of applying for a mortgage?

The first step when applying for a mortgage is estimating how much house you can actually afford. Once you have an idea of your budget, you can research mortgage types and lenders and get preapproved for a loan.

What are the steps of mortgage loan processing?

During mortgage loan processing, an underwriter will first review your personal information and information about the sale property to determine approval. The potential lender will request an appraisal of the home, and also request additional documents from you as needed. Finally, the underwriter will recommend approval or denial of the loan.

How long is a mortgage loan in processing?

It takes a little under two months from the date you submit your mortgage application and close on the house — the average timeline is 50 days. In some scenarios, you may be able to close in as little as 30 days.

How do you know when your mortgage loan is approved?

Your mortgage loan officer will contact you when your loan is approved. They may call you to give you the good news, but you’ll want to see it in writing so watch for an email as well.

What should I avoid after applying for a mortgage?

You want to keep your financial situation as stable as possible during the mortgage application process. That means don’t open new credit accounts, and keep your credit utilization down (no extra swipes on those credit cards). Don’t fall behind on any bill, either.

Photo credit: iStock/MicroStockHub

*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.

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 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.

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

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Unlike student loans or mortgages, personal loans have a relatively short repayment timeline — typically around two to five years. Still, there may be situations when you want to pay off the remaining balance on a personal loan even faster. Is that possible? The short answer is “yes” and, in many cases, it can be a wise decision.

But if there’s a prepayment penalty, then this loan payoff may be more costly than you’d expect. Learning how a prepayment penalty might affect your payoff amount can be helpful in making the decision whether or not to pay off a personal loan early. And if you’re gathering information about a personal loan early payoff without incurring a prepayment penalty, you do have some options.

How to Manage Your Personal Loans

Securing a personal loan may be top of mind for borrowers, but just as important is figuring out how to repay the debt. Having some basic info on hand — such as your monthly take-home pay, the cost of your essentials and non-essentials, and short- and long-term savings goals — will help.

While there’s no one-size-fits-all strategy to budgeting, here are two popular budgeting methods to consider:

•   50/30/20 budget. With the 50/30/20 budget strategy, your take-home pay falls into three main buckets, according to percentages: 50% to “needs” (housing, utilities, groceries, etc.), 30% to “wants” (take-out meals, entertainment, travel costs, etc.), and 20% to savings (emergency fund; IRA or other retirement contributions; debt repayment and extra loan payments, etc.)

•   Zero-Sum Budget. This type of budget calls for earmarking every dollar you earn for either savings or discretionary spending. First, you assign monthly after-tax income dollars to non-negotiable bills, such as rent and groceries. Then you assign leftover funds to discretionary spending and saving, which could include making extra payments on a personal loan.

Tips to Pay Down Your Personal Loan

Creating a budget is one tool to consider, but here are other loan repayment strategies you may want to explore if you want to pay off the debt faster.

•   Switch to biweekly payments. Ramping up payments from once a month to twice a month could help you reduce the principal amount of a loan — and potentially pay off the debt — faster. It may even decrease how much interest you end up paying over the life of the loan.

•   Make extra payments when possible. Exceeding your minimum loan payments
may help accelerate your loan repayment and potentially minimize the cost of high interest rates.

•   Tap a second source of income. Starting a side hustle is one way to boost your income, and you can put the extra cash toward your debt. You can also use tax returns, work bonuses, even birthday gifts to pay down a personal loan faster.

•   Refinance your loan. When you refinance a loan, you’re essentially replacing your old loan with a new loan that has a different rate and/or repayment term. Depending on the new rate and term, you may be able to save money on interest and/or lower your monthly payments.

•   Round up monthly payments. Over time, rounding up payments to the nearest $50 or $100 could slightly accelerate your payment schedule.

It’s important to note that many personal loans come with early payment fees, which could undo whatever money you would have saved on interest. More on that below.


💡 Quick Tip: Fixed-interest-rate personal loans from SoFi make payments easy to track and give you a target payoff date to work toward.

Can You Pay Off a Personal Loan Early?

It’s unlikely that a lender would refuse an early loan payoff, so yes, you can pay off a personal loan early. What you have to calculate, though, is whether it’s financially advantageous to do so. If a personal loan early payoff triggers a prepayment penalty, it might not make financial sense to do so.

Understand Prepayment Penalties

If and how a prepayment penalty is charged on a personal loan will be stipulated in the loan agreement. Reviewing this document carefully is a good way to find out if the penalty could be charged and how your lender would calculate it.

If you can’t find the information in the loan agreement, ask your lender for the specifics of a prepayment penalty and for them to point out where it is in the loan agreement.

There are a few different ways a lender might calculate a prepayment penalty fee:

•   Interest costs. In this case, the lender would base the fee on the interest you would have paid if you had made regular payments over the total term. So, if you paid your loan off one year early, the penalty might be 12 months’ worth of interest.

•   Percentage of your remaining balance. This is a common way for prepayment penalties to work on mortgages, for example, and you’d be charged a percentage of what you still owe on your loan.

•   Flat fee. Under this scenario, you’d have to pay a predetermined flat fee for your penalty. So, whether you still owed $9,000 on your personal loan or $900, you’d have to pay the same penalty.

It may sound strange that a lender would include this kind of penalty in a loan agreement in the first place. Some lenders may, though, to ensure you’ll pay a certain amount of interest before the loan is paid off. It is an extra fee that, when charged, helps lenders recoup more money from borrowers.

Avoiding Prepayment Penalties

If your loan has a prepayment penalty, it could be in effect for the entire loan term or for a portion of it, depending upon how it’s defined in the loan agreement. However, you have some options.

For starters, you could simply decide not to pay the loan off early. This means you’ll need to continue to make regular payments rather than paying off the personal loan balance sooner. But this will allow you to avoid the prepayment penalty fee.

Or, you could talk to the lender and ask if the prepayment penalty could be waived.

If your prepayment penalty is not applicable throughout the entire term of the loan, you could wait until it expires before paying off your remaining balance.

Another strategy is to calculate the amount of remaining interest owed on your personal loan and compare that to the prepayment penalty. You may find that paying the loan off early, even if you do have to pay the prepayment penalty, would save money over continuing to make regular payments.

Recommended: How to Avoid Paying a Prepayment Penalty

Does Paying Off a Personal Loan Early Affect Your Credit Score?

Personal loans are a type of installment debt. In the calculation of your credit score, your payment history on installment debt is taken into account. If you’ve made regular, on-time payments, your credit score will likely be positively affected while you’re making payments during the loan’s term.

However, once an installment loan is paid off, it’s marked as closed on your credit report — “in good standing” if you made the payments on time — and will eventually be removed from your credit report after about 10 years.

So does paying off a loan early hurt your credit? Short answer, yes. Paying off the personal loan early might cause it to drop off of your credit report earlier than it would have, and it may no longer help your credit score.

If You Pay Off a Personal Loan Early, Do You Pay Less Interest?

Since a personal loan is an installment loan with a fixed end date, if you pay off a personal loan early, you won’t pay less interest. You won’t owe any interest anymore because the loan will be paid in full.

Recommended: Average Personal Loan Interest Rates & What Affects Them

Advantages and Disadvantages of Paying Off a Personal Loan Early

There are definitely some advantages to personal loan early payoff. One obvious benefit is that you could save on interest over the life of the loan.

For example, a $10,000 loan at 8% for 5 years (60 monthly payments) would accrue $2,166.50 in total interest. If you could pay an extra $50 each month, you could pay the loan off 14 months early and save $518.42 in interest.

Not owing that debt anymore can be a psychological comfort, potentially lowering bill-paying stress. If you’re able to make that money available for something else each month — maybe creating an emergency fund or adding to your retirement account — it might even turn into a financial gain.

If you no longer owe the personal loan debt, you’ll essentially be lowering your debt-to-income ratio, which could positively affect your credit score.

That said, if your personal loan agreement includes a prepayment penalty, paying off your personal loan early might not be financially advantageous. Some prepayment penalty clauses are for specific time frames in the loan’s term, e.g., during the first year.

If you pay off the loan during the penalty time frame, it could cost you just as much money as it might if you had just paid regular principal and interest payments over the life of the loan.

You might be thinking of a personal loan early payoff so you can put your money to work somewhere else. But if the interest rate on the personal loan is relatively low, it might make financial sense to put your extra money toward higher-interest debt, or to contribute enough to an employer-sponsored retirement plan so you can get the employer match, if one is offered.

Another thing to consider is whether paying off your personal loan early will hurt your credit. As mentioned above, making regular, on-time payments to an installment loan like a personal loan can have a positive effect on your credit score. But when the loan is paid off, and marked as such on your credit report, it’s not as much help.

What Happens If You Don’t Pay Back a Personal Loan?

Let’s say your personal loan payment is due by the 1st of every month. One month, the 10th arrives and you realize you haven’t paid what you owe. You’ll likely be considered delinquent on the loan. You may also be hit with a late fee, and your credit score could be impacted.

When Is a Loan Considered to Be in Default?

What happens if you stop making payments on a loan altogether? Then you’ll likely be considered in default on the loan. Note that there’s no set amount of time when a loan is considered in default — a borrower may be one payment behind or they may have missed 10 in a row. It depends on the type of loan, the lender, and the loan agreement.

What Happens When You Default on a Personal Loan?

When you default on a personal loan, you’ll likely be charged late fees. But you may face other consequences, such as:

•   Your credit may be damaged. Creditors may report payments that are more than 30 days late to the credit bureaus. The missing payments could end up on your credit reports and stay there for up to seven years. This could cause your credit scores to drop and may pose an issue the next time you apply for new credit.

•   You may need to deal with debt collectors. If you fall far enough behind to be contacted by a debt collector, you may encounter aggressive behavior on the part of the collection agency. However, keep in mind that the Fair Debt Collection Practices Act limits just how far debt collectors can go in trying to recover a debt. If you feel a debt collector has gone too far, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).

•   You could be sued. A lender or collection agency may file suit against you if they believe you aren’t going to repay the money you owe on a personal loan. If the judgment goes against you, your wages could be garnished, or the court could place a lien on your property.

•   Your cosigner may be impacted. If you have a cosigner or co-applicant on your personal loan, and you default on that loan, they could be impacted. For example, a debt collector could contact you and your cosigner about making payments. And if your credit score drops because of a default, theirs may drop, too.

If you’re facing a loan default, there are some things you can do now to help yourself. A good first step is to contact the lender, preferably before your next payment is due. Explain your situation to them, and find out if they can offer you any relief measures — for example, temporarily deferring loan payments.

You may also want to reach out to a credit counselor. They can work with you to create a budget that covers the essentials and frees up funds so you can pay down what you owe.

Depending on your situation, it may also be a good move to contact a lawyer. Having legal assistance is especially crucial if you’ve been served with a lawsuit.

Recommended: Better Money Management Tips

Types of Personal Loans

In general, there are two types of personal loans — secured and unsecured. Secured loans are backed by collateral, which is an asset of value owned by the loan applicant, such as a vehicle, real estate, or an investment account.

Unsecured personal loans are backed only by the borrower’s creditworthiness, with no asset attached to the loan. You might hear unsecured personal loans referred to as signature loans, good faith loans, or character loans. Typically, these are installment loans the borrower repays at a certain interest rate over a predetermined period of time.

Personal Loan Uses

Acceptable uses of personal loan funds cover a wide range, including, but not limited to:

•   Consolidation of high-interest debt

•   Medical expenses not covered by health insurance

•   Home renovation or repair projects

•   Wedding expenses

While there are benefits to taking out a personal loan, it might not always be the right financial move for everyone. Personal loans offer a lot of flexibility, but they are still a form of debt, so it’s a good idea to weigh the pros and cons before signing a personal loan agreement.


💡 Quick Tip: With low interest rates compared to credit cards, a personal loan for credit card consolidation can substantially lower your payments.

The Takeaway

If you’re able to pay off your personal loan early, that’s terrific. Doing so could help you save on interest over the life of the loan, provide more of a cushion in your monthly budget, lower your debt-to-income ratio, and alleviate debt-related stress.

However, before you pay off the balance, it’s a smart idea to calculate whether it’s a good financial decision or not. If your personal loan agreement includes a prepayment penalty that could take a bite out of any savings you might see on interest costs. Removing a history of regular payments on a loan too early can have a slight negative impact on your credit. Plus, the extra money might be put to better use in another financial tool.

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

FAQ

Is it good to repay a personal loan early?

Paying off a personal loan early can be a good financial decision, as long as any prepayment penalty charge doesn’t cost more than you might pay in interest.

If I pay off a personal loan early, do I pay less interest?

Paying off a personal loan early doesn’t affect the interest rate you’ve been paying up until that point. It would mean, however, that the total amount of interest you’d pay over the life of the loan would be less than anticipated.

Does paying off a personal loan early hurt your credit?

Because making regular, on-time payments on an installment loan such as a personal loan is a positive record on your credit report, removing that history early can have a slight negative affect on your credit.

What is the smartest way to pay off a loan?

There are a number of ways you can go about paying down debt. Two popular methods include the avalanche method (which focuses on making extra payments toward highest-interest rate debt first) and the snowball method (which calls for paying off the smallest debt first, the moving on the next largest debt, and so on).

Do you save money if you pay off loans early?

Paying off loans early could save borrowers money in interest. However, they may be hit with a prepayment penalty, which could negate those savings.

Are shorter or longer loans better?

It depends on your financial needs and goals. Generally speaking, borrowers with longer-term loans tend to pay more interest. By comparison, borrowers with shorter-term loans typically have lower interest costs but higher monthly payments.

How long can you stretch out a personal loan?

Lenders offer a range of loan term lengths, though generally speaking, most are between two and seven years.

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

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

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.

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

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

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When you partner up, it’s likely that you are focused on building a home together and merging lifestyles: morning person vs. night owl, how to accommodate both of your vinyl and book collections, and so forth.

But there’s another important consideration: setting up a budget for two. You may choose to combine some, all, or none of your funds, But many people do want to mix at least some of their money and get on track for shared budgeting, spending, and saving.

This guide can help you explore your options and make the right decisions. You’ll learn such points as:

•   Why to budget as a couple

•   How to budget as a couple

•   Pros and cons of budgeting as a couple.

How to Budget as a Couple

Here are some steps to take when you budget as a couple.

Decide How Much You Want to Combine Your Money

Depending on how much you want to combine finances as a couple is a key part of budgeting as a couple. Each of you will have your own money style and potentially money issues, so a frank discussion on how comfortable you are merging your money and sharing, say, your spending habits is a wise first step.

Calculate Your Combined Income

If you have decided on merging at least some of your funds, take a look at your shared income to know what amount you are working with. Consider if you are on salary, freelance, have side hustle income, or dividends/passive income to come up with the right number.

Determine Shared Expenses

Next, look at where that income will go. You likely have shared housing, food, utilities, transportation, insurance, and healthcare expenses in terms of necessities. You may have varying debt payments to make as well.

Perhaps one of you has more in the way of student loans or credit card debt than the other. Discuss what feels fair in terms of paying that down.

You will also probably want to take a look at your usual discretionary spending, such as what you pay towards dining out, travel, entertainment, yoga classes, clothing, and the like.

You may decide you are more comfortable keeping some of your money separate rather than have full transparency regarding every dollar spent. It’s your call.

Figure out Future Goals

Then, turn your attention towards saving. Perhaps you two want to buy a home in a couple of years, start a family, begin a business, or pad out your retirement account. Or all of the above. You’ll want to factor in those savings for tomorrow.

Make Your Budget

With this information in hand, you’re ready to create a budget. It can be wise to review a few different types together, such as the popular 50/30/20 budget rule, the envelope budget system, and the zero-dollar method.

Recommended: Check out the 50/30/20 budget calculator to see the breakdown of your money.

Create Joint Accounts

At this point, if you have decided to merge some of your money, you may want to open shared accounts, such as a joint checking and savings.

💡 Quick Tip: Bank fees eat away at your hard-earned money. To protect your cash, open a checking account with no fees online — and earn up to 0.50% APY, too.

7 Reasons to Budget as a Couple

Budgeting as a couple vs. budgeting as two individuals can have its pros. Consider the following.

1. Controlling Your Spending as a Team

One of the basics of budgeting is to prioritize your spending. Once you, as a couple budgeting, have decided where your money must go every month — toward groceries, utility bills, car payments, rent, and other essential expenses — you’ll have a better idea of how much will be left for discretionary expenses.

And instead of being restrictive, your budget could give you some spending flexibility. You’ll know if you need to cut back and when you can loosen up a little, and you’ll be accountable to each other.

Sometimes, one person in a couple budgeting is better at finances or just enjoys it more. It might be a good fit for that person to be in charge of managing the bills. But it’s also a good plan to come together for regular budget reviews so both of you know where the money is going and there will be some balance in the financial decision making.

Leave room for some splurges, or the spender in the family probably won’t be too happy. And be proactive about big purchases: Identify a threshold for how much each of you can spend so there are no surprises. Or, of course, you can keep some discretionary spending separate if this feels too stressful for the two of you.

2. Being Honest About Money Problems

This can be the time to talk about any hidden debts, bad habits that cost money, or if you can’t trust yourself not to overspend when there’s a credit card in your wallet.

Then you can start tackling those issues by setting spending limits, cutting up some of those credit cards, perhaps getting financial therapy, and, of course, incorporating those looming debt payments into your budget.

3. Being Prepared for Emergencies

A common recommendation is to have three months’ worth of living expenses set aside in emergency savings in case you lose your job or are sick or injured and can’t work. An emergency fund can also be used for unexpected costs such as home or car repairs or a medical procedure.

Not only can a couple budgeting determine how much to set aside each month to build that emergency fund, you can also choose which expenses to put off or do without if you don’t have enough in your fund when a crisis strikes.

Some budget ideas for couples who need to cut back on spending are reducing the number of date nights you had planned or putting your tax refund toward a bill instead of taking a spring vacation.

Having a budget can help you replace panic with a plan, and having a financial tool like SoFi can help you keep tabs on your cash flow and spending habits.

Recommended: How Much Should You Keep in an Emergency Fund?

4. Creating Goals

If there’s a “fun” part of working together as a couple budgeting, this is it: deciding your priorities for the future.

Whether it’s saving for a home, having children, taking a cruise, starting your own business, or all of the above and more, your budget will help you focus on the things that are most meaningful to you as a couple.

Your strategy can help you set aside the money to reach those goals, aka turning the dreaming into doing. And you’re more likely to stay on track if you’re checking in on your spending each month.

5. Deciding How Much to Combine Finances

You will likely want to tackle the question of whether to have joint bank accounts vs. separate bank accounts or even a little of both. Making the right call can strengthen your bond financially and holistically.

You may decide to completely merge your bills and bank accounts, or you might want to keep your own accounts and divvy up the bills. There are pros and cons to each approach in budgeting for married couples or cohabiting couples.

Combining accounts can simplify your finances and build trust. But if you feel strongly about financial independence — or you’ve been burned in the past — you may feel more secure if you have your own money. Negotiating an agreement that’s comfortable for both parties can be a real win-win.

6. Reducing Financial Stress

Here’s a solid upside to merging your money: Once you get the numbers down on paper instead of just swirling around in your head, you may feel more in control of your finances. Even if the situation is shaky, you can take steps to do something about it. What’s more, you are likely on a path to making your money work harder for you.

7. Having Something to Talk About

Here’s another benefit: Once you create your couples budget, you’re going to want to revisit it on a regular basis. You can discuss how your various budget categories are holding up and if you need to make adjustments. Or how to tweak your budget so you can afford that destination wedding. You’ll be able to sync up as a team.

It’s a good idea to go over any upcoming expenses that aren’t in the budget or only come up occasionally. And you can talk about how you’re doing with your short-term financial goals as well as your long-term ones.

An example of longer-term money aspirations? You can take a closer look at how college expenses for your future kids are trending. Or what might be a good monthly retirement income for a couple.

Are There Any Downsides to Budgeting as a Couple?

Now that you know the positives, consider these potential negatives whether you are marking a married couple budget or budgeting as a couple living together:

•   A partner could feel as if they have less control over their money, which could be uncomfortable.

•   A person could feel as if their partner’s spending habits are challenging.

•   The full transparency of merging finances could be a problem for some people who don’t like sharing their financial life.

•   There could be more time and effort and potentially banking fees involved as you set up joint accounts and find a new way to operate as a team.

Budgeting and Saving with SoFi

The good news, especially for those who dig technology, is that there are plenty of online tools and apps that can help you put together a budget and manage your money as a couple.

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

FAQ

What is the best way to budget as a couple?

A key decision will be how much of your money to merge, looking at shared income and expenses, determining goals, and then finding a budget that works for both of you. Regular check-ins to see how you are managing your money are important too.

How do you split finances as a couple?

This will vary from couple to couple. Some will want to pool all of their resources and pay everything 50-50. Others may have circumstances (such as one partner having considerable credit card debt) that indicate a different arrangement may be necessary.

How much should a couple save per month?

How much a couple should save per month will depend on a variety of factors such as income, cost of living, and debt. However, many financial experts suggest saving 20% of one’s income is a good guideline.

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