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When you’ve decided on a house to buy and entered into escrow, you can expect to receive a preliminary title report. The report will verify ownership and reveal any lurking issues that will not be covered under a subsequent title insurance policy.

This is an important step: When you’re buying a home, the preliminary title report gives you the chance to remove or eliminate problems before you close on the property. This can help you avoid any legal headaches that arise from those issues.

Here’s a look at how to read these documents and what kind of information you can expect to find in them, including what is a preliminary title report, how to read a preliminary title report, what is a title report vs. title insurance, and more.

Title Insurance 101

First, you’ll need to understand what title insurance is. A title is the set of legal rights you have to a property once you buy it. A clear title is the goal, meaning you want the property to be free of liens and other ownership claims. You may have qualified for a mortgage, but you will need to resolve any title issues in order to get to the closing.

Title insurance protects both buyers and lenders against any problems with a title when ownership of a property transfers from one person to another. During or after a sale, if there is a title dispute, the insurance company may be responsible for paying certain legal damages. If you don’t have title insurance, you could be responsible for any issues that crop up.

There may be two forms of title insurance involved in a sale. If you are borrowing money to buy a home, you may purchase lender’s title insurance, which protects the lender. Owner’s title insurance, less common, is usually purchased by the seller to protect the buyer.

Reading a Preliminary Title Report

When you receive the preliminary title report, look for the following information:

Owner of Record

The preliminary title report will start with the name of the owner of record. If you’re buying a home, this should be the seller’s name. If it isn’t, that’s a major red flag, and you should let your escrow or title officer know.

Statement of Vesting

Next, the report will lay out the extent of the current owner’s interest in the property. The fullest type of ownership, and the most common, is known as “fee simple” or “fee.” This means a person wholly owns a piece of land and all the real estate on it.

There may be other types of ownership that will show up in this section. For example, you might see a leasehold estate, which gives a tenant exclusive rights to use a property owned by someone else for a set period of time.

Legal Description

The legal description details the property location, lot size, boundaries, and any easements or encroachments.
For condominiums and planned unit developments, the legal description might include common areas, parking, storage, and easements that convey.

A plot map, which shows how land is divided into plots, may be included as well to show the general location of a property.

Exceptions

Exceptions will be listed numerically and are matters that your title insurance policy will not cover. They may include:

•   General tax issues. Are there unpaid taxes? Property taxes will show up as the primary “lien” and as due or paid in full. Property taxes must be paid for the property sale to go through. And tax classifications could affect the new owner. For instance, if land is classified as agricultural, there could be penalties for withdrawing from that classification.

•   Assessments. Are there delinquent water or sewer bills owed to the city that need to be paid before closing?

•   Encumbrances. These might include liens from creditors or lenders, or liens for the payment of federal taxes or assessments. They might also include liens against a property because of back-due child support or spousal support. Are there loans against the property you weren’t aware of, such as additional mortgage loans?

•   Covenants, conditions and restrictions, also known as CC&Rs. These are rules that homeowners must follow in a planned community or common interest development. They might determine whether you are allowed to park on the street, what kind of fence you can put up, or what color you can paint your house.

•   Easements. An easement is the right another party has to the property you’re interested in buying. For example, neighbors may have a right of way that allows them to access their property through yours. Or a utility company might have the right to install, access, or maintain equipment on the property, such as power lines or cable.

•   Other issues. There are other matters that may appear on the preliminary title report, such as bankruptcies or notices of action, which are court proceedings that are underway and involve the property.

The transfer of property is subject to these exceptions unless they are dealt with by the seller before the sale.

If any liens or encumbrances crop on your preliminary title report, you have the chance to clear them before the sale goes through. Together with your real estate agent you can work with the sellers and their agent to clear the title before you take it on.

If you have any questions about your preliminary report, you can contact your real estate agent, an attorney, or your escrow or title officer.

Standard Exceptions and Exclusions

In addition to the list of exceptions that are particular to the home you want to buy, there are standard exceptions and exclusions that a title insurance policy won’t cover.

Building codes and restrictions are exempt from title insurance coverage, as are zoning restrictions or other regulations for how land can be used in certain areas.

Sometimes a building is subject to zoning restrictions. For example, it may be in a historical district that restricts how a buyer can develop the property.

Recommended: How to Make an Offer on a House

How to Get a Title Report for a Property

As part of the homebuying process, your lender will likely require a preliminary title report and title insurance.

In many cases, the seller will request the title report from a title company once an escrow account is opened. The seller includes this information as part of their disclosure package.

Recommended: Mortgage Pre-Qualification vs. Pre-Approval: The Differences

Title Report vs. Title Insurance

As mentioned above, once you open escrow, an order is placed with the title company to produce your preliminary title report. The company will assemble and review records having to do with the property you want to buy. The title report will give you insights into whether the property has, say, any liens on it or other issues.

Title insurance, on the other hand, is indemnity insurance. It protects both lenders and homebuyers from enduring financial loss if there were any defects in a property’s title. (Title insurance is different from homeowners insurance and you’ll need both.)

Limitations of the Preliminary Title Report

Be aware that the preliminary title report only shows the matters that the title company will exclude from coverage when and if a title insurance policy is issued.

It is not a complete picture of the condition of the property. And it may not even list all of the liens and other encumbrances that may affect the title of the property.

The Takeaway

Think of a preliminary title report like a background check on a home, revealing tax, lien, or ownership poltergeists lurking. Knowing how to read a preliminary title report helps prevent spooky surprises. It’s an important step in getting to the closing table and moving into your new home.

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

FAQ

Who should order the preliminary title report?

It is usually the seller’s responsibility to order the preliminary title report as part of their disclosures about the property. Work with your real estate agent to make sure the title report has been ordered to keep moving smoothly toward your closing date.

What could a preliminary title report reveal?

A title report will show who owns the property and could reveal liens, covenants, easements and other restrictions on the property. This gives you and the seller an opportunity to clear these up before the sale goes through.

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.

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If you think you need a down payment of 20% of a property’s price in order to start home shopping, think again. Most homebuyers put down a significantly smaller amount. Opting for a lower down payment has the benefit of getting you into a home sooner than if you scrimped and saved for years. And you might reap the benefit from market appreciation as soon as you own a property.

Prospective homeowners may explore such options as mortgages with lower down payments (some are even available with 0% down to qualified borrowers), as well as down payment assistance programs.

Learn more here, including:

•   What is a down payment?

•   How much money should you put down to buy a house?

•   How can you lower down payment requirements when buying a property?

What Is a Down Payment?

First, the basics: What exactly is a down payment? A down payment is the amount of money that goes paid, in cash, toward the purchase price of the home. It must cover the gap between the purchase price of the home and the amount of the mortgage.

A down payment determines what kind of loan you can get, whether or not you’ll pay private mortgage insurance (PMI), what your monthly payment will be and even what your interest rate will be. A down payment doesn’t include closing costs.


💡 Quick Tip: Don’t overpay for your mortgage. Get a competitive rate by shopping around for a home loan.

How Much Should You Put Down on a House?

You might be wondering how much is a down payment and how long it will take you to save that down payment amount for. Here are some options to consider when it comes to down payment amounts:

•   20% Down payment: Many people believe mortgage lenders say this is the amount they must come up with, though that is not true. Yes, a bigger down payment lowers your mortgage. Your monthly mortgage payment is lower because of your higher down payment, and you’ll pay less interest over the life of the loan. Also, when your down payment is above 20%, your lender does not require you to purchase PMI, which can save you hundreds of dollars each month.

But paying 20% can take a lot of cash out of your pocket when you buy your home. For example, 20% on a home that costs $400,000 is $80,000 dollars. There are many people who want to buy a property, but simply can’t come up with that amount of cash or at least not until they’ve saved for a considerable amount of time.

•   8% Down payment: This is the average down payment on a house for first-time homebuyers, according to the National Association of Realtors®. (For repeat homebuyers, the figure jumps to 19%.) Making this much of a down payment means you won’t avoid PMI in most cases, but you’ll be able to buy a home with a smaller down payment and without having to save as much money. For a house that costs $400,000, that’s $32,000 you need to come up with.

•   3% to 5% Down payment: With a down payment between 3% and 5%, you’ll have a higher monthly payment because your loan amount is higher than if you were able to make a larger down payment. You’ll also pay more each month because of the PMI payment. Lower down payments mean you’ll also pay more interest over the life of the loan.

However, the main benefit of a low-down-payment loan is you’re able to buy a home sooner than if you wait to save a full 20%. For a $400,000 home, a 3% down payment is $12,000 and a 5% down payment is $20,000. Some loans have the option of eliminating PMI once the loan’s remaining principal balance drops to or below 80% of the original mortgage.

•   0% Down payment: Zero down payment options come with higher monthly payments, and there may be certain restrictions or qualifications (say, a certificate of eligibility for military members). They may be niche programs specific to a group of people or locality. Some zero-down programs do not require PMI, but may have an upfront cost to fund their own mortgage insurance, like USDA loans (more on those in a minute).

Considerations to Determine Your Down Payment

The large amount of cash typically needed makes first time homebuyers wonder how they can afford a down payment and if it’s possible to figure out how to lower a down payment on a house. A couple of points to consider:

•   It is possible to get a lower mortgage payment by paying down principal on your home with a larger down payment. A 20% down payment on a house eliminates the need to pay PMI every month, which saves you even more on your monthly payment. In this way, a larger down payment can benefit your cash flow and overall financial situation.

•   However, 20% of the price of a home in your market may be hard to save for. You can learn how to buy a house with no money down, but there are also 3%, 3.5%, or 5% down payment options available. A lower down payment may be able to help you buy a home sooner. You can begin reaping the benefits of home ownership that much soon and hopefully your home’s value will rise, contributing to your personal wealth.

Recommended: First-Time Home Buyer Programs

How to Lower Down Payment Requirements?

If you’re moving towards purchasing a home, you might be wondering if you can lower your down payment before closing. Generally speaking, you have a handful of options for lowering your minimum down payment amount requirement as you take out a home mortgage loan and become a homeowner.

Buy a Home in an Area Approved for USDA Loans

USDA loans have 0% down payment requirements, so if you can find a home in an area approved by USDA (typically but not always in a rural location), you may be able to get a 0% down payment loan. For the USDA loan, there are property and income requirements which are determined by the county you live in (or want to live in).

Use a VA Loan to Buy a Home

Qualifying veterans, active duty, National Guard, and Reserve members of the military can use a VA loan, a mortgage that comes with zero-down-payment financing.


💡 Quick Tip: Apply for a VA loan and borrow up to $1.5 million with a fixed- or adjustable-rate mortgage. The flexibility extends to the down payment, too — qualified VA homebuyers don’t even need one!^{†^}

Pay the Minimum Amount for a Down Payment

One solution is to look for a loan without potentially restrictive eligibility requirements, as with a USDA or VA loan, and instead shop around for a loan that has low down payment policies. Many lenders offer mortgages with as little as 3% down, which may work well for some homebuyers.

Find a Down Payment Assistance (DPA) Program

Down payment assistance programs vary from area to area as far as requirements and amounts go. If you really need down payment assistance, try to buy a home in an area that offers one of these options. DPAs are usually reserved for first-time homebuyers or low- to moderate-income buyers. They typically come in three forms:

•   Second mortgage. DPAs are often offered in the form of a second mortgage with low or zero interest rates. Some second mortgages may not need to be repaid after living in the home for a certain period of time, while others may only need to be repaid when the property is sold.

•   Grant. With a grant, the money you receive is not expected to be repaid. However, there may be requirements for living in the home as a primary residence for a certain number of years for the grant to be forgiven.

•   Tax credit. Tax credits can reduce the amount of federal tax you owe if the local housing finance agency (HFA) issues you a mortgage credit certificate. This certificate can free up money for down payment and closing costs.

Some examples of DPA programs across the U.S. include:

•   Kentucky: Borrowers can receive up to $10,000 repayable over a 10-year period at 3.75% interest via the Kentucky Housing Corporation.

•   California: CalHFA has down payment assistance loans of up to the lesser of 3.5% of the purchase price or appraised value to qualifying homebuyers.

•   New York City: The HomeFirst Down Payment Assistance Program offers up to $100,000 for first-time homebuyers who qualify.

•   Montana: Borrowers can qualify for up to $15,000 in assistance for a down payment from Montana Housing. Repayment is either due when the home is sold or in the form of a 15-year loan.

•   Chenoa Fund: The Chenoa Fund is a nationwide down payment assistance program for creditworthy individuals on FHA loans up to 5% of the down payment needed for low- to moderate-income households. Both repayable and forgivable options are available.

In some areas, DPA programs can be hard to find or difficult to qualify for. Your lender can be an excellent resource if you need help buying a home with a small down payment. Discuss options with a representative and see what is available.

Negotiate for Lender Credits

Lenders want your business, especially in a high-rate environment. You can ask for credits to be applied to your closing costs. When your closing costs are covered by the lender, you can put more of your money toward your down payment.

Ask for Seller Concessions

When you negotiate the purchase of property, you can ask for seller concessions. These typically determine home’s purchase price and which closing costs the seller is willing to pay. Like lender credits, you can put more of your own money towards the down payment when a seller can cover some of your closing costs.

Ask for a Gift from Family

Of course, not every prospective homebuyer is blessed with a relative who has money in the bank they might give you or lend to you with generous repayment terms. But if you are in a spot and unable to come up with the funds otherwise, you might see if anyone is able and willing to help you out.

The Takeaway

While they may come with higher monthly mortgage payments, lower down payment mortgages can help borrowers buy homes sooner. Lowering your down payment requires a good amount of research on the part of the borrower, exploring different loans, programs, and other options to help you afford a property.

Even then, you may not find a perfect solution. That’s why it can be important to choose a mortgage partner who’s willing to be with you every step of the way.

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

FAQ

How much money to put down on a house in 2024?

Deciding on how much money to put down depends on your individual financial situation, the area in which you live, and programs you’re able to qualify for. While putting down 20% could save you the money you would pay towards PMI, you may be able to get into a house sooner by paying a lower down payment amount (from 0% to 3.5%). First-time homebuyers are currently putting down 8% on average.

How can I get my house down payment lowered?

To get your down payment lowered, you can try: financing with a zero-down loan (such as a USDA or VA loan), asking for seller concessions, negotiating for lender credits, and looking for down payment assistance programs.

Will mortgage interest rates go down 2024?

It is looking likely that mortgage interest rates will stabilize or decline. At the start of 2024, both the Mortgage Bankers Association and Fannie Mae were calling for rates to decline to the 6% to 6.5% range in the year ahead.

Does having a cosigner lower your down payment?

A cosigner can help you qualify for a mortgage, but it won’t change the requirements of the mortgage. Different loan programs will each have their own down payment requirements.

Photo credit: iStock/aydinmutlu

*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 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.

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It’s a good idea to regularly review your credit report. Doing so can help ensure that the information used to calculate your credit scores is accurate and up to date. It can also alert you to fraud or identity theft.

Unfortunately, understanding your credit report can sometimes feel like a challenge — especially if it’s the first time you’re doing it. Below, learn how to read a credit report, as well as highlight some common credit report errors to look out for.

What Is a Credit Report?

Your credit report contains a large amount of information about your financial life and payment history. If you have credit cards or loans, for instance, those accounts and how you pay them are included in your credit report. Often, you’ll have more than one credit report, as creditors are not required to report to every credit reporting company.

Credit card issuers and lenders can pull these reports and review them in order to determine your creditworthiness. They will rely on this information to make a decision on whether to loan you money, as well as the terms they’ll offer if they do.

Who Compiles Credit Reports?

Credit reports are created by three national credit reporting agencies: Equifax®, TransUnion®, and Experian®. The information the credit bureaus compile in credit reports comes from creditors — like lenders, credit card companies, and other financial companies — that submit information on your accounts and payment history to the bureaus.

Who Can See Your Credit Report?

Your credit report is accessed whenever a lender (or an employer or landlord) conducts what’s known as a hard credit inquiry. This is when a business accesses your credit report to make decisions about your creditworthiness, likely in order to make a decision about extending a loan (or a job or housing).

Hard credit inquiries will appear on your credit report, so you should recognize any credit inquiries that appear. They may also subtly affect your credit score. Multiple inquiries in a short period of time may signify to lenders that you’re seeking multiple loans, which may bring up concerns about your financial stability.

Your credit report can also be accessed by consumers (like you). The Fair Credit Reporting Act requires each of the credit reporting companies to provide you with a free copy of your credit report, at your request, once every 12 months. As of early 2025, each of the big three credit bureaus is providing weekly free credit reports at AnnualCreditReport.com. Your credit score will not be impacted when you request a copy of your own credit report.

How to Get a Credit Report

As noted above, you have the right to ask for one free copy of your credit report from each of the credit bureaus, at least annually and possibly weekly. There are a few ways you can request it:

•   By visiting AnnualCreditReport.com

•   By calling (877) 322-8228

•   By downloading and filling out the Annual Credit Report Request form, and mailing it to the following address:

    Annual Credit Report Request Service

    P.O. Box 105281

    Atlanta, GA 30348-5281

You also can request credit reports from consumer reporting companies, though these may charge a fee. Additionally, you’re eligible to request free reports under certain circumstances, such as being denied credit or due to potential inaccuracies because of fraud.

Also know that you can only check your own credit report — checking someone else’s credit report is generally illegal.

Recommended: What is a Charge Card?

Reading Your Credit Report

When you get your credit reports, it’s a good idea to read each section closely. Here’s a rundown of the sections you’ll typically find included, so you’ll know what to expect and thus how to read a credit report.

Personally Identifiable Information (PII)

This section of the report is used to identify you. It contains basic information like your name, address, and place of employment. You may also find previous addresses and employer history listed here. Your employment history doesn’t affect your credit score. Rather, it’s included on your credit report only to verify your identity.

When scanning this area you’ll want to make sure that your name, address, and employer match up. Any incorrect or unfamiliar personally identifiable information (like company names you don’t recognize or employers you never worked for) may be a sign of identity fraud.

Credit Summary

This section summarizes information about the different types of accounts you have, including credit cards and lines of credit, mortgages and other loans, and any accounts that have been sent to collections. For each account, your credit report will include the date the account was opened, its balance, its highest balance, the credit limit or loan amount, payment status, and payment history.

As you read this section, make sure that all the information looks familiar. It’s not unusual for a credit report to have slightly dated information, such as a higher balance because you just paid off a bill this month. However, all information should seem recognizable. In particular, you’re looking for:

•   Unfamiliar accounts

•   Late payments that do not align with your records

•   Balances that do not match your records

Recommended: What is the Average Credit Card Limit?

Public Records

The information in this section is pulled from public records and may include debt collections or bankruptcy information.

If you missed a credit card payment due date and have any debt collections and bankruptcy on your record, it’s important to remember that they won’t stay there permanently. The following statutes of limitations apply to different types of debt, restricting how long the information will remain on your credit report:

•   Chapter 13 bankruptcy: Removed seven years after the filing date

•   Chapter 7 bankruptcy: Removed 10 years after the filing date

•   Late payments: Removed seven years after they occur

•   Payment defaults: Removed seven years after they occur

If you see information that’s not familiar, you’ll want to flag it, since this could be a sign of identity theft. You may also want to flag any information that is still on your credit report after the statute of limitations has expired.

Credit Inquiries

Credit inquiries list all parties who have accessed your credit report within the past two years.
These could be from lines of credit you opened, such as applying for a credit card, or from applying for a loan.

Both hard inquiries and soft inquiries will appear, though they have different impacts on your credit — hard inquiries will affect your credit, whereas soft inquiries will not. You can distinguish the two types of inquiries based on how they appear on the report:

It’s a good idea to make sure you recognize any recent credit inquiries, as they can be a red flag for identity theft.

Why Credit Reports Are Important

Your credit report can play a critical role in determining your financial future. That’s because creditors will refer to your credit report to decide whether to approve you for a loan or a credit card and, if so, what terms they’ll offer you, including the interest rate. In other words, your credit report will help determine whether you’ll get the auto loan you need to purchase a new car or the mortgage necessary to purchase a home. And if you’ve used a credit card responsibly, that could help open the door to additional lines of credit.

It’s not just creditors looking at your credit report either — landlords, insurers, potential employers, and even phone and cable companies may look at your credit report as part of their vetting process. This is why it’s so important to understand what information your credit report contains, so you can know what information these potential parties can learn from viewing it.

Recommended: How to Avoid Interest On a Credit Card

What Information Is Not Found on Your Credit Reports?

One surprising piece of data that you may be surprised to find out credit reports do not include is your credit score. Beyond that, your credit report will not contain the following information:

•   Salary

•   Employment status

•   Marital status

•   Spouse’s credit history, if applicable

•   Assets, such as bank account balances, investments, or retirement accounts

•   Any 401(k) loans

•   Public records outside of bankruptcy

•   Medical information

•   Expired information

•   Race or ethnicity

•   Religious beliefs or information

•   Political affiliates

•   Disabilities

What To Do If You Find Errors on Your Credit Report

None of the information on your credit report should look unfamiliar. In fact, one of the main reasons you want to read your credit report is to make sure that your credit report matches your records.

But sometimes, there can be discrepancies. If you detect an error on your report, such as a payment incorrectly reported as late, you’ll want to file a formal dispute. You’ll need to dispute credit report errors with both the credit reporting company and the entity that provided the information (such as a credit card company).

When writing a dispute letter, you’ll want to include:

•   A clear explanation of what is wrong in the credit report.

•   Supporting documentation showing the information is inaccurate (such as a copy of a paid bill).

•   A request for the information to be fixed.

By law, the credit reporting company must investigate your dispute and notify you of its findings.

If you notice an error that suggests identity theft (such as unknown accounts or unfamiliar debt), it’s a good idea to sign up with the Federal Trade Commission’s (FTC’s) IdentityTheft.gov site in addition to alerting the credit bureaus. The FTC’s tool can help users create a recovery plan and figure out next steps, which may include placing a security freeze on your accounts.

The Takeaway

It’s easy and free once a year (or more often) to gain access to your credit reports from the three major bureaus. Reviewing your credit report can give you a chance to correct any errors, and make sure your credit report is an accurate representation of your financial situation. It can also alert you to any fraudulent activity. In addition, reading your credit report can help you understand how creditors see you as a borrower and identify any potentially problematic information that may negatively impact your creditworthiness.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

When should you check your credit report?

The Consumer Financial Protection Bureau (CFPB) recommends checking your credit report at least once a year to ensure there are no errors and that all information is up-to-date. You might consider checking them even more frequently than that though to have the most accurate picture of your current financial situation.

What do the numbers mean on a credit report?

Your credit report may contain a variety of different numbers. This can include your name identification number, your Social Security number, the IDs for addresses associated with your credit, phone numbers, account numbers, and more. It can help to go through section by section if you’re unclear as to what a particular number means.

What should I look for on a credit report?

When reading your credit report, you’ll want to look out for any changes to your personal information, such as changes to account details, inquiries, or data available in public records. Keep your eye out for any errors or anything that otherwise seems amiss, as this could be a sign of fraud.

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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 .

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

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As demand for home improvement work has kept up at a steady pace, so has the rate of home improvement fraud. Bringing a stranger into your home can be a leap of faith, especially if you haven’t done all your homework. Knowing the signs of home improvement fraud may keep you from becoming the next victim of a home repair scam.

What Is a Home Improvement Scam?

A home improvement scam occurs when a company or contractor — or a con artist posing as one — tries to swindle a homeowner out of money in exchange for a renovation or remodel that goes unfinished or is botched.

Many times home improvement scammers go door to door in search of their next victims. With the average cost of a home remodel in the upper tens of thousands of dollars, there is a lot of money at stake. A rule of thumb: If an offer sounds too good to be true, it probably is.


💡 Quick Tip: You never know when you might need funds for an unexpected repair or other big bill. So apply for a HELOC (a home equity line of credit) brokered by SoFi today: You’ll help ensure the money will be there when you need it, and at lower interest rates than with most credit cards.

Examples of Home Improvement Scams

There are many kinds of home improvement scams out there. Seniors have been the most targeted group, but people of all ages need to stay alert to these common frauds.

The ‘Free’ Inspection

“There’s no such thing as a free lunch” holds true when it comes to someone showing up on your doorstep and offering a free inspection. What’s their end game?

The Better Business Bureau reports that scammers and con artists will talk their way into a home to, say, inspect a roof, then cause damage like tearing off shingles to create a situation that actually then does require repairs.

Advertising by Flyer

Handymen often blanket communities with flyers in the hopes that a small percentage of people will call. It’s a good idea to treat such random distributions in your neighborhood as a sign to double-check credentials and legitimacy.

You may also find this a common occurrence after a storm if you live in a location prone to hurricanes or tornadoes. It would be smart to do your research before signing over your insurance check to someone who drops off a flyer.

Door-to-Door Contractors

If a contractor knocks on your door claiming to have leftover supplies from another project and offers you services for a steal, that’s a red flag. While the door-to-door salesman might be a real contractor, anyone going door to door to solicit business is likely not a professional who is in demand.

The Handshake Deal

No contract? No job. Homeowners should always have an ironclad contract in place before any money is exchanged. And if a contractor asks for cash, that’s a potential sign of a scammer (or at least someone looking to avoid the IRS).

Likewise, the contractor should not ask for more money than was decided on in the initial contract and scope of work. Claiming unexpected problems is a sign of a potential scam or an inexperienced contractor.

If there are potential variables in the project, you might want to spell out in the contract that extra work will require a change order, that is, both parties will agree to the additional work and an added fee.

If you’ve arranged for a home improvement loan or other financing, predictability comes in handy.

No-Credential Contractors

Many states don’t require a credential from a contractor if the amount of their annual work is below a certain dollar figure. While it’s unusual for a home improvement company or individual to not have credentials, it’s not unprecedented.

In general, it’s wise to treat non-credentialed contractors with a healthy awareness that they potentially aren’t serious businesspeople.


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How to Avoid a Home Improvement Scam

While home repair scams are good to know about — especially if you’ve bought a fixer-upper — it’s also important to realize that not every contractor falls into that category, of course. If you take these tips into account, you’ll help yourself avoid a home improvement scam down the road.

Consider Only Contractors Who Are Licensed and Insured

It’s always smart to work with only licensed professionals who are insured, but in this case especially, a contractor who has their own license and insurance is likely not to be a scammer.

One way to get a background check on a contractor candidate is by calling the Better Business Bureau and requesting their rating, as well as asking if there are any complaints against them.

Get Recommendations From People You Trust

One way to avoid getting scammed is by working with contractors who come highly recommended by your friends, family, colleagues, or acquaintances. It’s always a gamble hiring a worker you find via online sources, so the more personal ties you have to contractors — like connections to those who have actually hired them in the past — the less likely it is that you’ll fall victim to a scam.

Get Multiple Estimates

For any construction or remodel project, you’ll want to solicit bids. Usually a minimum of three bids will give you an idea of the price range for your home improvement ideas.

By getting estimates from various professional contractors, you’re less likely to get scammed by someone trying to take advantage of you because, say, you live in a high-dollar neighborhood or drive a nice car. You can also use a home improvement cost calculator to help you estimate what the cost of your project should be.

Read the Contract Carefully

One of the easiest ways to be taken advantage of in any project is by not reading the contract in detail. If the contract is only one page long and doesn’t spell out the basics like budget, deposit, timing, or how to handle change orders, you’re setting yourself up for potential issues as money starts changing hands and construction begins.

And if there are areas of concern in the contract the contractor gives you, you might consider hiring a lawyer to review it and make any necessary revisions for you.

The Takeaway

Stay alert to home repair scams by getting referrals, asking contractors for references, reading all contracts meticulously, and only hiring professionals who provide you with proof that they are licensed and insured.

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FAQ

What to do if you get scammed by a contractor?

If you do find yourself the victim of a home repair scam, there are many organizations you could call for help. You might want to start with your local branch of the FBI, then submit a scam tip to the National Consumers League fraud website. Additionally, you can lodge a complaint with the Better Business Bureau and consult Call for Action, a nonprofit that advocates for consumers by investigating fraudulent contractors.

What should you not say to a contractor?

Agreeing to a large deposit without a commitment to start work is a common mistake. It’s also important to let the contractor know that you’ll be expecting certain benchmarks to be met as the project continues.

Can I withhold payment from a contractor?

If a contractor does not uphold their side of the contract, you can often legally withhold payment until the full scope of work is completed as outlined in the signed agreement.

How much of a deposit should you give a contractor?

A deposit of 10% to 25% is common for a construction project. Certain states may have home improvement laws that, for example, prohibit a contractor from taking more than one-third of the job payment as a deposit upfront.

Photo credit: iStock/SeventyFour

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.

SOHL0124032

One of the time-honored ways to build wealth and financial stability is by buying real estate. Properties typically appreciate over time and may provide cash flow as well.

Owning your own home not only gives you a great place to live, but it will likely turn out to be a good investment, one that can help build generational wealth for your family.

What Is Considered Generational Wealth?

Generational wealth refers to assets passed on from one generation to another within the same family. Assets is a broad term that includes cash; stocks, bonds and other securities; a family business; and real estate, including the family home.

Because of the high rates of appreciation in the past several decades, real estate can be one of the most valuable assets passed down from one generation to another.


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How Does Homeownership Build Wealth?

Homeownership can help build wealth directly through price appreciation. When the value of a home rises, owners are able to sell for that higher price, sometimes moving into a new, larger home. For homeowners who aren’t selling, price appreciation adds to their home equity and overall financial assets.

Of course, if home values decline, as they did in the 2007-2009 Great Recession, the opposite can happen and owners may find they owe more than the home is worth. But real estate has proved to be one of the most reliable assets in the long term.

The bottom line: A person’s home is often their largest financial asset, the benefits of which are often passed on to the next generation.

If you’re just getting started, know that a first-time homebuyer can be anyone who has not owned a principal residence in the past three years, some single parents, and others. The prospective purchasers can often get assistance (such as low or no down payment) as they progress towards buying their first property. Programs such as these can be a stepping stone to building generational wealth.

Direct and Indirect Building of Wealth

Next, consider different ways of building wealth over the generations.

Inheritance

Inheriting appreciated capital assets like real estate, stocks, bonds, ETFs, or a small business can have a big tax benefit, thanks to the “step-up in basis.” The value of the inherited asset is “stepped up” to the fair market value on the date the original owner dies.

If the heir sells the property, the step-up in basis will greatly reduce capital gains taxes due or make them moot if there is no gain. Any capital gain from the sale of inherited property is considered long-term. Current long-term capital gains taxes are 0%, 15%, or 20%, depending on your income and filing status.

For married couples, the death of one spouse results in a partial step-up in most states, but here’s a simplified example. Let’s say you inherit your grandmother’s home, purchased in 1940 for $10,000. The home is valued at $450,000 on the date of her death, which is the stepped-up basis. If you sell the home for $450,000, you’ll pay no capital gains tax. If you sell for a higher sum, capital gains tax will apply only to the amount over $450,000.

Imagine using the stepped-up basis provision over more than one generation of a family. An heir could sell a phenomenally appreciated asset and pay a minimal amount in capital gains tax or none at all on their inheritance, as long as the asset was included in the decedent’s estate.

Indirect Benefits

Heirs of homeowners may well inherit the actual real estate, but generational wealth can also be more indirect. Consider these points:

•   Homeowners are often more financially secure than renters, passing that security on to children.

•   Homeowners are able to borrow against the equity to improve the home (and often boost its value) or take care of other financial needs.

•   Many homeowners are located in districts with high-performing schools, enhancing overall opportunities for their children.

•   Down the line, the equity in a home can help finance retirement and health care needs, shielding adult children from that financial burden.

All of these factors can positively affect the next generation and add to their wealth.

How Discrimination Can Affect Generational Wealth

When housing discrimination occurs, it can keep people of color, women, and families with children, immigrants, and people with disabilities from living in the place they want. Importantly, it can also have a serious impact on generational wealth.

Considering the following statistics from the Fed for the fourth quarter of 2023:

The homeownership rate for non-Hispanic white households overwhelmingly led the pack, at 73.8%. Asian, Native Hawaiian, and Pacific Islander families came a distant second, at 63%. Hispanic families of any race had only a 49.8% homeownership rate, and African American households logged in at 45.9%.

A number of factors have contributed to the race gap in homeownership; not the least is the legacy of race-based discrimination in the housing market.

When homeownership lags among a certain group because of housing discrimination, so does the possibility for generational wealth.


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Understanding Home Appreciation and Home Equity

To understand how homeownership can build wealth, it’s important to understand the concepts of home appreciation rates and home equity. These are some key points:

•   The increase in the value of a home over time is known as appreciation or the appreciation rate.

•   Home equity is the property value minus the outstanding balance of mortgages, liens, or other debt on the property.

•   Your first contribution to home equity is your down payment.

•   Every time you make a monthly mortgage payment, you are paying down the amount you owe and slowly paying part of the principal on your loan, which builds equity.

•   Price appreciation and home improvements can also add to home equity.

Most people purchase real estate with the expectation that their home will increase in value over time. But many things come into play when it comes to home appreciation and the amount of home equity you can build. Some you can control and some you can’t.

Recommended: How Much Is a Down Payment on a House?

The Economy

Housing prices can be affected by several economic indicators. When a recession hits, unemployment rises, or inflation jumps, the real estate market often declines.

Interest rates are also vitally important. Low mortgage interest rates can fuel demand, which can increase home prices in many areas. Conversely, a rise in mortgage rates can have a cooling effect on buyer demand.

The correlation between the housing markets and the rest of the economy can be surprising at times. For instance, during the initial stages of the pandemic, when economic indicators were showing signs of trouble, the nation saw a giant rise in home prices. This was particularly true in rural and suburban areas as urban dwellers sought more space and fewer crowds.

Recommended: How Rising Inflation Affects Mortgage Interest Rates

Laws and Regulations

Federal legislation can have a big effect on the U.S. housing market. Government tax credits, deductions, and subsidies aimed at certain homeowners can fuel the housing markets.

Local policies and regulations can also affect housing appreciation. Local investments in infrastructure or new schools and parks can increase your home’s value. Local zoning laws can also have an effect, positive or negative.

Home Improvements

This encompasses everything from an extensive addition to a fresh coat of paint. All kinds of improvements can add to the resale value of your home and, importantly, enhance your life while you’re living there.

Whether you decide to remodel a kitchen, a bathroom, or a remodel a living room, updated appliances and décor and energy-efficient improvements are often valuable upgrades.

To fund them, some homeowners use home improvement loans.

Is Homeownership a Smart Investment?

The answer to that question isn’t always straightforward. First, your home is the place where you live, of course, and hopefully you derive happiness from that. In that sense, the costs associated with your home and your mortgage payment can be considered living expenses, not necessarily an investment.

On the other hand, appreciation and home equity can be seen as the return on your investment in your home.

The sweet spot is often a combination of the two: a great place to live and a profitable investment.

Still, homeowners’ net worth far outpaces renters’. Every three years, the Federal Reserve issues the Survey of Consumer Finances, which compares the net worth of homeowners and renters. The latest report shows that homeowners had a median net worth of $396,200; renters, $10,400.

Keeping your expectations realistic can effectively put your home value into the context of your overall financial wellness and estate planning. To do that, you may need to keep in mind the total costs of owning and maintaining real estate. Too often, people subtract their purchase price from the expected sale price and figure the difference is the return on investment. But there are many more costs involved in homeownership.

To calculate your true return, you’ll want to add up the following:

•   Down payment

•   Closing costs

•   Mortgage points

•   Any mortgage insurance

•   Home maintenance expenses

•   Home improvements

•   Total mortgage payments

•   Taxes

•   Any homeowners association fees

•   Estimated selling costs (such as the real estate agent’s fees and staging charges).

That total is the number you want to compare against home appreciation to determine your actual return.

The Takeaway

How does homeownership build generational wealth? In direct and indirect ways. The real estate itself can likely grow in value, and the homeowner may enjoy such benefits as raising a family in a good school district. Buying real estate can build a foundation for a family today and for generations ahead.

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.

Photo credit: iStock/Capuski

*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 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.