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If you are offered a relatively low mortgage rate, locking it in can secure it and potentially save you a bundle of money over the life of your loan. In other words, it can be a smart move.

That said, when applying for a mortgage, you only have so much control over the mortgage rate, as lenders will consider your credit score, income, and assets to determine your risk as a borrower. What’s more, mortgage rates change daily based on external economic factors like investment activity and inflation.

Read on to learn how a mortgage rate lock works and the benefits and downsides of using this option.

What Is a Mortgage Rate Lock?

A mortgage rate lock is an agreement between a borrower and lender to secure an interest rate on a mortgage for a set period of time. Locking in your mortgage rate safeguards you from market fluctuations while the lender underwrites and processes your loan.

Interest rates can rise and fall significantly between mortgage preapproval and closing on a property.

Remember that in the home-buying process, when you’re pre-approved for a mortgage, you will know exactly how much you most likely can borrow, and then you can shop for a home in that range.

So when can you lock in a mortgage rate? Depending on the lender, you may have the option to lock in the rate any time between preapproval and when underwriting begins.

Before preapproval and locking in, it’s recommended to get multiple offers when shopping for a mortgage to find a competitive rate.


💡 Quick Tip: Want the comforts of home and to feel comfortable with your home loan? SoFi has a simple online application and a team dedicated to closing your loan on time. No surprise SoFi has been named a Top Online Lender in 2024 by LendingTree/Newsweek.

How a Mortgage Rate Lock Works

Mortgage rate locks are more complicated than simply securing a set rate in perpetuity. How the rate lock works in practice will vary among lenders, loan terms, different types of mortgages, and geographic locations.

Once you lock a mortgage rate, there are three possible scenarios: Interest rates will increase, decrease, or stay the same. The ideal outcome is securing a lower rate than the prevailing market interest rate at the time of closing.

Here are some key points to know if you are considering a rate lock:

•   Rate locks are sometimes free but often cost between 0.25% and 0.50% of the loan amount.

•   When you choose to lock in your rate, it’s stabilized for a set period of time — usually for 30 to 60 days, but up to 120 days may be available.

•   If the rate lock expires before closing on the property, the ability to extend is subject to the lender.

•   Time it right. The average mortgage took 44 days to close as of February 2024, according to ICE Mortgage Technology, underscoring the importance of timing a mortgage rate lock with your expected closing date. Otherwise, you could face fees for extending the rate lock or have to settle for a new, potentially higher rate.

•   Whether borrowers are charged for a rate lock depends on the lender. It could be baked into the cost of the offer or tacked on as a flat fee or percentage of the loan amount. The longer the lock period, the higher the fees, generally speaking.

•   Lenders have the discretion to void the rate lock and change your rate based on your personal financial situation. Say you take out a new line of credit to cover an emergency expense during the mortgage underwriting process. This could affect your credit and debt-to-income ratio, causing the lender to reevaluate your eligibility for the offered rate and financing.

•   Lenders also determine the mortgage rate based on the types of houses a borrower is looking at: A primary residence vs. a vacation home or investment property, for example, would influence the interest rate.

Recommended: A Guide to Buying a Duplex

Consequences of Not Locking in Your Mortgage Rate

There are risks to not locking in a mortgage rate before closing.

If you don’t lock in a rate, it can change at any time. An uptick in interest rates would translate to a higher monthly mortgage payment. Granted, a slight bump to your monthly payment may not lead to mortgage relief, but it could cost thousands over time.

Example: The monthly payment on a $300,000 loan at a 30-year fixed rate would go up by $88 if the interest rate increased from 4% to 4.5%. This would add up to an extra $31,611 in interest paid over the life of the loan.

You can use a mortgage calculator tool to see how much a rise in rates could affect your mortgage payment.

Furthermore, a higher monthly payment might potentially disqualify you from financing, depending on the impact on your debt-to-income ratio. After a jump in interest rates, borrowers may need to make a larger down payment or buy mortgage points upfront to obtain financing.

Even if you lock in a mortgage rate early on, you could face these consequences if it expires before closing. Deciding when to lock in a mortgage rate should account for any potential contingencies that could delay the process.
If you’re unsure, ask your lender for guidance on when you should lock in.


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

What to Do if Interest Rates Fall After Your Rate Lock

The main concern with mortgage rate locks is that you could miss out on a lower rate. In most cases, buyers will pay the rate they are locked in at if the prevailing interest rate is less.

A float-down option, however, protects you from rate increases while letting you switch to the lower interest rate at closing.

•   Float-down policies vary by lender but generally cost more than a conventional rate lock for the added flexibility and assurance.

•   It’s also possible that a float-down option won’t be triggered unless a certain threshold is met for the drop in rates.

•   It’s worth noting that borrowers aren’t committed to the mortgage lender until closing, so reapplying elsewhere is an option if rates change considerably.

Pros and Cons of Mortgage Rate Lock

Back to the big question: Should I lock my mortgage rate today? It’s important to weigh the pros and cons to decide when to lock in a mortgage rate.

The Takeaway

A favorable interest rate can make a difference in your home-buying budget. If you’re considering a rate lock because you’re concerned that rates will be rising, it’s important to choose a lock period that gives the lender ample time to process the loan to avoid extra fees or a potentially higher rate.

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

FAQ

How long does a rate lock period last?

Rate locks usually last 30 to 60 days but can be shorter or longer depending on the agreement. It’s not uncommon for lenders to offer a free rate lock for a designated time frame.

Should you use a mortgage rate “float-down”?

If you’re worried about missing out on low interest rates, a mortgage rate float-down option could let you secure the current rate with the option to take a lower one if rates drop. Take note that these agreements usually outline a specified period and minimum amount the rate must drop to activate the float-down.

How much does a rate lock cost?

Lenders don’t always charge for a rate lock. If they do, you can expect costs to range from 0.25% to 0.50% of the loan amount for a lock period (usually 30 to 60 days). A longer lock period or adding a float-down option typically increases the rate lock cost.

What happens if my rate lock expires?

If your rate lock expires before you’ve finalized the deal, you can choose to extend the lock period (usually for a fee) or take the prevailing rate when you close on the loan.

Photo credit: iStock/Vertigo3d

*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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Renting out a room in your house can be a good source of extra income but generally isn’t something you want to do on a whim. From legal and financial considerations to aesthetics, there are lots of things to think about before offering the space to a potential housemate.

Here are some things to consider before renting out a room in your house.

What Are Some Room Rental Options?

Renting out a room in your house doesn’t have to mean having one long-term renter, although that’s certainly one way to go. Here’s a look at a few different rental options.

Short-term Rental

One option you might consider is offering short-term rentals through a service such as Airbnb or Vrbo. This could be a good option if you live in an in-demand tourist area or have a home in an out-of-the-way locale that might attract someone looking for a place to relax and unwind. Some travelers prefer to stay somewhere that feels more like a home than a hotel.

Recommended: 25 Things to Know When Renting Out an Airbnb

Long-term Rental

Having a housemate who is planning to rent a room in your home for an extended period of time can be one way to have a steady income for that time period. It’s a good idea to have a formal rental agreement that clearly outlines expectations of both parties.

Furnished or Unfurnished Rental

Whether to offer a furnished or unfurnished space will probably be determined by the type of renter you’re looking for. If you live in a college town, prospective renters might not have any furnishings of their own, so will likely be looking for a furnished rental. As with a short-term rental mentioned above, a furnished rental will probably be a given. A potential long-term housemate, though, may have their own furnishings to bring to the space.

What Financial Considerations Are There?

For some people, the sole reason for renting a room in their house is to have some extra income. With income, though, generally come expenses.

Return on Investment

It’s not likely that a spare room is ready for a renter without some updating and perhaps even some repairs. Keeping a record of how much money you spend preparing the space will help you determine if you’re coming out ahead financially. It may take some time to recoup the money you spend before you make a profit. And it’s a good idea to have a record of any ongoing expenses you incur to make sure you’re charging enough rent to offset those costs.

Recommended: What Is Considered a Good Return on Investment?

Taxes

In most cases, there will be income tax implications, so it’s wise to treat renting a room in your house as a business of sorts. As such, it’s a good idea to consult a tax professional who can answer detailed questions about rental income.

The IRS considers rental of part of your property, such as a spare room, as taxable income. And, like some business expenses, there are expenses related to this type of rental that are tax deductible. Any deductions claimed must be directly related to the portion of the home that is used for rental purposes and is generally calculated as a percentage of the home’s total square footage.

Recommended: 25 Tax Deductions for Freelancers

Are There any Legal Considerations?

It’s wise to look at your state’s landlord-tenant laws as a first step. Some states are more landlord friendly, while other states have a wide range of protections for tenants, putting more limitations on landlords’ rights.

Even if you’re just renting out a room to an acquaintance, you’ll likely still be considered a landlord and must adhere to regulations that apply to your situation. The Fair Housing Act protects potential tenants from discrimination except in limited circumstances. Shared housing is one of those circumstances because the government concluded that sharing one’s personal space has “significant privacy and safety considerations” in a U.S. Court of Appeals ruling.

Neighborhood Restrictions

Aside from governmental legal considerations, it’s a good idea to check your apartment lease or your neighborhood or homeowner’s association, if you have one, as some homeowner’s associations may have regulations about leasing all or part of your home. If you’re renting a home or apartment, your lease may specify whether you’re allowed to sublease or if you’re restricted from doing so.

Your homeowner’s insurance policy may also include a clause related to leasing part of your home. Some companies may allow you to rent a room in your home without any change to your policy, while others may disallow it completely. There’s a chance you may see an increase in your premium, as well. To be on the safe side, it’s a good idea to let your insurance agent know of any change in your home’s occupancy.

Recommended: Condo vs Townhouse

Screening Tenants

Finding the right person to share your personal space may take some time. You likely have certain things you’re looking for in a potential renter along with other things that might be deal-breakers. Maybe you’re looking for a non-smoker who has a solid rental history. A rental application is one tool that can help you find a housemate that fits the bill.

You may want to run a credit check and a background check on any applicants who are truly interested in renting a room in your house. These checks generally have fees associated with them, and it’s a good idea to specify in the rental application who will be responsible for paying for credit and/or background check.

The applicant’s permission is required to run either of these checks and they are entitled to know if the results of either a credit or background check resulted in the denial of their rental application. It’s important to make sure you’re complying with fair housing laws when screening potential tenants and aren’t discriminating against certain applicants.

Rental Agreement

Having a formal, written lease in place will go a long way in protecting both you and your renter. A thorough agreement might include:

•   The leasing period — it’s typical for a lease to be for one year, but if you’re renting a room to college students, you may consider a shorter lease for the duration of the school year. This section might specifically note the move-in and move-out dates.

•   Rent amount — including the due date, how you would like to collect it, and any late fees you might charge.

•   Security deposit — the amount and conditions for returning or withholding it at the end of the lease.

•   Utility costs — are they included in the monthly rent or will the renter be responsible for paying their share of the total bills?

•   Shared spaces — expectations around common areas like the kitchen, living room, and bathroom.

•   Pets — are they allowed or not, as well as policies about pet messes and noise.

•   Cleaning and maintenance — will the renter be responsible for regular house cleaning, including private and common areas, and home maintenance, inside or out?

•   Parking — if there is a parking space available, is it included in the rent or is it a separate charge?

Covering a wide variety of things in a rental agreement can go a long way in avoiding misunderstanding and miscommunication between you and your tenant. Having an attorney review the agreement is a good way to make sure you’re not missing important elements. Lease agreements are legally binding contracts when signed by both parties.

It’s also a good idea to do a walk-through of the room with the tenant before signing the lease and again before they move out. Any damage can be documented (e.g., carpet stains, scratches on woodwork, torn window screen, among other things) so it’s clear that the tenant isn’t responsible for that damage. A final walk-through can be done before the tenant moves out, during which any additional damage can be documented and accounted for.

What Are the Costs of Renting a Room in Your House?

You may encounter costs preparing a room to be rented as well as ongoing expenses related to having another person living in the home.

Preparing the Room for Rental

Safety for you and your tenant are important concerns. You may want to make sure doors and window locks are in good working order. Your tenant will likely want their room to be private, so a keyed lock on their door can go a long way to easing any concerns they might have about living in someone else’s home. Providing a combination safe for the tenant’s valuables might be a nice gesture.

Installing locks on doors to any areas you don’t want your tenant to have access to is another layer of safety you may want to consider.

Fixing loose railings, sticking doors or windows, flooring trip hazards, and doing other home maintenance that could become safety issues is important in making your home and the individual room an attractive rental prospect for tenants.

You may want to make some cosmetic changes, too.

•   Painting the walls a neutral color may allow a prospective tenant to imagine their belongings in the room, instead of bright colors that might be a distraction to them. Using an easy-to-clean paint finish, like satin instead of flat, may also save you some effort after your tenant moves out.

•   If the room is carpeted, you might consider having the carpet cleaned, either professionally or using your own carpet cleaner. If the room is furnished with upholstered furniture, it can also be cleaned. Doing so will help the room look and smell fresh.

•   If you’re renting a furnished room, make sure the furnishings are clean and in good condition. Even used furniture can be presentable.

•   If the tenant will have a private bathroom space, the fixtures should be as modern as possible, but more importantly, clean and working. If the faucet drips, if the bathtub leaks, if the toilet runs — make the repairs before renting the room.

•   Is the bathroom a shared space? You might consider adding some baskets or other types of storage for the tenant’s personal hygiene products. Making a cabinet available for their own use would be nice if there is space to do so.

•   Cleaning, decluttering, and updating other shared spaces such as the living room and kitchen can make your home look more inviting, possibly increasing your chances of finding a renter.

•   You might consider adding some storage space for a tenant’s use. It could be as simple as a stand-alone cabinet or a designated area in a basement or garage. The rental agreement could specify what isn’t allowed to be stored (e.g., no hazardous chemicals) and how much storage space is allotted. A prospective tenant might feel more comfortable storing belongings if the space is able to be secured.

Recommended: 20 Renter-Friendly House Updates

Increased Utility Costs

An extra person living in the house will likely increase utility usage. Costs for gas, electric, water, sewer, and other utilities will probably be more than you typically pay without an extra person in the house. You may want to calculate your average utility costs over the past year to have an idea what an extra person’s use might add to those costs.

Some landlords include the cost of utilities in the cost of rent, while others might require the tenant to cover a percentage of each monthly utility bill. When renting out a room in your house, it may not be convenient to have separate utility connections for a renter.

Covering the Cost of Making Your Room Rental Ready

Depending on how much work needs to be done, getting a room in your house ready for someone to rent could be a few hundred dollars or a few thousand dollars. You may be able to keep costs down by doing some of the work yourself, but you might need to hire a professional contractor for some tasks you don’t have the skills to tackle or don’t feel comfortable doing on your own. It can help to think of this as an investment with a potential for a return in the form of rental income.

Taking some time to save money for the expense of getting a room in your house rental ready can be a smart choice. It can at least be one way to pay for some basic tasks, while considering other funding sources for more expensive repairs.

If you don’t have cash on hand, you could put all these expenses on one or more credit cards. But because credit cards carry such high interest rates, you might want to avoid racking up a credit card bill you can’t pay down any time soon.

Homeowners who have equity in their homes might consider taking out a home equity loan or home equity line of credit. These secured loans use your house as collateral. The application process can be lengthy and typically requires an appraisal of your home. Also, you risk losing your home if you don’t repay the loan.

Another option is to apply for a personal loan. Personal loans are typically unsecured loans, which means you don’t have to put up any collateral to qualify for them. Many personal loans also have fixed interest rates.

The Takeaway

From your personal comfort level for sharing your space with someone to financial and legal considerations, there are lots of things to consider before deciding to rent out a room in your house. You may need to complete some repairs to make the space safe for a tenant, and there may be some decor updating necessary to interest potential renters. However, you can likely more than make up for these upfront costs in rental income.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

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.

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A mortgage contingency allows homebuyers to exit the purchase contract without legal repercussions should they be unable to secure financing by the agreed-upon deadline.

Consider this scenario: You found a gem of a home that many others are eyeballing. You make an offer and cough up earnest money to show that you mean business. You’ve been preapproved for a mortgage, so financing seems a shoo-in — until you hit a snag. That’s when a mortgage contingency becomes important.

If you’re unable to obtain financing by the deadline, you can walk away from the purchase agreement and have your earnest money returned.

Some non-cash buyers consider waiving the mortgage contingency to make their offer more competitive in a hot market, but of course, that involves risk. Here’s the scoop on the financing contingency.

What Is a Mortgage Contingency?

Should something unexpected happen, like a job loss or the inability to sell an existing home, a mortgage contingency clause in the purchase agreement allows buyers to back out of the contract and have their earnest money returned. An earnest money deposit isn’t small potatoes for anyone, but that’s especially true for those who are competing against multiple offers: Buyers might lay down as much as 10% of the home’s sale price as a good-faith deposit.

A mortgage contingency also protects both buyers and sellers from uncertainty in the real estate transaction. It’s one of several contingencies that buyers might include in the contract when the property listing status changes to contingent but not yet pending.


💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.

The Mortgage Contingency Clause

The mortgage contingency clause gives the buyers a time frame to go shopping for a mortgage or move beyond preapproval. Though the clause may vary from contract to contract, most will allow buyers to back out of the contract if they do not directly cause the financing to fail. The earnest money held in escrow is returned to the buyer.

Even when buyers have mortgage preapproval, financing can fall through at the last minute. This is the legal “out” if that happens.

Recommended: What Is the Difference Between Pending and Contingent Offers?

How Mortgage Contingency Works

Buyers find a home and make an offer and the seller’s real estate agent or attorney draws up a contract for the purchase of the property. Many buyers include in their offer a mortgage contingency, which has a deadline. If the sellers agree to this contingency (and other conditions of the offer), they sign the contract. The mortgage contingency becomes legally binding at this point.

Next, buyers complete a full application with the lender of their choice. The lender will review the buyer’s finances in-depth, and mortgage underwriting will make a final decision on whether or not to approve the loan.

If the mortgage is denied, the buyers are able to exit the contract and have their earnest money returned when a mortgage contingency is included.

In the absence of a mortgage contingency, the sellers would be able to keep the buyers’ earnest money and put the property back on the market to find another buyer.

How Long Does a Contingency Contract Last?

When buyers submit an offer, they will suggest a deadline for mortgage financing alongside the mortgage contingency. Typically, the time frame to secure a loan is 30 to 60 days.

Mortgage Contingency Clause Elements

Some mortgage contingency clauses are simple and give the buyers absolute discretion in obtaining financing acceptable to them. In others, financing is more specifically described. This variance depends on your contract and state law. Elements can include a mortgage contingency deadline, type of mortgage, amount needed, closing fees, and interest rate.

Mortgage Contingency Deadline

The mortgage contingency deadline is how long the buyer has to find approval for a mortgage. The deadline is often suggested by the buyer in the contract when an offer is made on the property.

When the seller signs the offer, the contingencies become legally binding and must be followed in good faith. Should a buyer need an extension of the deadline, an addendum must be submitted to and agreed upon by the seller.

Type of Mortgage

There are many different types of mortgages a buyer can use to purchase property, so while one loan may not work for a buyer’s situation, another may. Buyers may have the option of selecting a conventional or government-insured loan, a jumbo loan, a mortgage with a term of 30, 15, or other years, or an interest-only mortgage. A lender can help walk buyers through their options.

Amount Needed

A mortgage contingency clause can also designate the amount needed to secure the loan. A mortgage calculator tool can help buyers estimate how much a mortgage payment is going to be and the total amount a borrower can qualify for.

Closing Fees

The mortgage contingency can stipulate what closing fees and mortgage points are acceptable.

Maximum Interest Rate

An interest rate can be specified that the lender must provide before the mortgage contingency is satisfied. This makes it so the buyer can back out of the contract if the costs are too high.

Can You Waive a Mortgage Contingency?

Yes. Mortgage preapproval can help make your offer more competitive, but you may still waive the mortgage contingency. In that case, your earnest money is at risk, and you’re not able to renegotiate the contract if the appraisal comes in low. Keep in mind that FHA and VA loans do not allow buyers to waive the appraisal (which is an important part of the financing contingency).

Reasons to Waive a Mortgage Contingency

There are some scenarios where it doesn’t make sense to include a mortgage contingency in the contract:

•   When the buyer is able to pay cash for the property. Cash buyers do not have to include a mortgage contingency.

•   When owner financing is involved. If the current owner of the home is financing the sale, buyers do not need to include a mortgage contingency.

•   When competition is extremely high. It might be a good idea to look at this option as a last resort, but in a market where sellers only accept offers without contingencies, this could be a buyer’s only way to win the contract.

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

Other Common Types of Contingency Clauses

The financing contingency isn’t the only common one in a contract. Some others are:

•   Inspection contingency. This is a contingency that allows the buyer to exit the contract should the property fail a home inspection.

•   Appraisal contingency. This contingency is connected to the financing contingency. Should the property fail to appraise for the amount needed to finance the loan, the buyer would have the option of renegotiating or dropping the contract.

•   Title contingency. A property needs to be free of title defects for the sale of the property to go through.

•   Sale of home contingency. This contingency allows buyers to sell their current home before completing the purchase of a new home.

Recommended: How to Read a Preliminary Title Report

The Takeaway

A mortgage contingency protects homebuyers’ ability to get their earnest money back if financing falls through. Waiving the mortgage contingency in a hot market could put some house hunters at the front of the line, but it’s a risk only those feeling confident in their financial situation should take.

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

Can you waive a mortgage contingency?

Yes. Even if you need to obtain financing, waiving the mortgage contingency is an option.

What does no mortgage contingency mean?

No mortgage contingency means that buyers are willing to take on the risk of losing their earnest money if they are unable to secure financing by the closing deadline.

Should you waive mortgage contingency?

Homebuyers willing to take the risk of losing their earnest money to the seller to better compete are best poised to waive the mortgage contingency. Buyers who are not willing to risk their earnest money should not waive the mortgage contingency.

How long does a mortgage contingency usually take?

A mortgage contingency is usually set between 30 and 60 days.

Photo credit: iStock/kate_sept2004

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

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

What Is an MCC?

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

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

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

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

Recommended: First-Time Homebuyer Guide

How Does It Work?

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

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

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

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

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

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

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

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

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

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

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

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

Mortgage Credit Certificate Pros and Cons

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

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

How to Get a Mortgage Credit Certificate

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

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

Other criteria to get an MCC include the following:

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

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

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

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

Claiming a Mortgage Credit Certificate on Your Taxes

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

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

The Takeaway

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

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

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

FAQ

Who gives you the mortgage credit certificate?

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

Does everyone get a mortgage credit certificate?

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

Can I refinance with a mortgage credit certificate?

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

How do I know if I have an MCC?

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

Do I lose my mortgage credit certificate if I refinance?

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

Photo credit: iStock/Morsa Images

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Subprime mortgages allow borrowers with lower credit scores to obtain homeownership, but the homebuyers pay a steep price for the privilege, thanks to the higher risk to lenders. Fortunately, there is hope for subprime borrowers who raise their credit profiles through consistent, on-time payments: They can look into refinancing. Here’s a closer look at the subprime mortgage world.

What Is a Subprime Mortgage?

A subprime mortgage is a housing loan made to a borrower with a subprime credit score, typically one in the 580 to 669 range, although what constitutes a prime and subprime credit score can vary among lenders and organizations. A credit score above 670 is considered prime, according to Experian, which tracks data on the credit industry. (And generally speaking, to qualify for the best interest rates, a borrower needs a “super prime” score of 740 or better.)

Borrowers with lower credit scores represent a greater risk to the lender; they are statistically more likely to have trouble paying on time. So subprime mortgages often come with higher interest rates and larger down payments to help protect the lender from the increased risk of default.

Subprime borrowers accept these terms because they cannot qualify for a conventional mortgage — one from a private lender like a bank, credit union, or mortgage company — with lower costs. Subprime mortgages are different from government-backed loans for borrowers with low credit scores (such as FHA loans backed by the Federal Housing Administration).

Note: SoFi does not offer subprime mortgages at this time. However, SoFi does offer mortgage loan options.

💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you through the process.

How Subprime Mortgages Work

The main difference between a mortgage loan offered to a prime borrower vs. a subprime borrower is cost. Borrowers go through the same rigorous underwriting process with a lender and must submit documentation to verify income, employment, and assets.

But in the end, a prime borrower is offered the best rates, while a subprime borrower with so-called bad credit has to put more money down, pay more in fees, and pay a much higher interest rate over the life of the loan. Subprime mortgages also are often adjustable-rate mortgages, which means the payment can go up based on market indices after a predetermined period of time.

Subprime Mortgages and the 2008 Housing Market Crash

Subprime mortgages became popular in the 2000s as more high-risk mortgages were made available to subprime borrowers. In 2005, subprime mortgages accounted for 20% of all new mortgage loans.

It became possible for a lender to originate more of these high-risk mortgages because of a new financial product called private-label mortgage-backed securities, sold to investors to fund the mortgages. The investments masked the risk of the subprime mortgages within.

Home prices soared as more borrowers sought out the various subprime mortgages being offered. Rising home prices also protected the investors of mortgage-backed securities from losses.

When the housing market had passed its peak and borrowers had no viable option for selling or refinancing their homes, properties began to fall into default. In an attempt to reduce their risk exposure, lenders originated fewer loans and increased requirements for all borrowers. This depressed the market further.

Financial institutions that had taken strong positions in mortgage-backed securities were also in trouble. Many of the largest banking institutions in the world filed for bankruptcy, and the world learned once again what stock market crashes are.

In response to the financial crisis, the Federal Reserve implemented low mortgage rates in an attempt to jumpstart the economy.

Subprime Mortgage Regulations

In the wake of the financial crisis, Congress passed the Dodd-Frank Act to reduce excessive risk-taking in the mortgage industry. It established rules for what qualified mortgages are, which gave lenders a set of rules to follow to ensure that borrowers had the ability to repay the loans they were applying for.

It also provided regulation of qualified mortgages, including:

•   Limiting mortgages to 30-year terms

•   Limiting the amount of debt a borrower can take on to 43%

•   Barring interest-only payments

•   Barring negative amortization

•   Barring balloon payments

•   Putting a cap on fees and points a borrower can be charged for a loan

Subprime mortgages are not qualified mortgages. Borrowers who seek non-qualified mortgage loans may include self-employed people who want a more flexible financial verification process, people who have high debt, and people who want an interest-only loan.

Types of Subprime Mortgages

The most common types of subprime mortgages are adjustable-rate mortgages (ARMs), extended-term mortgages, and interest-only mortgages.

•   ARMs. Adjustable-rate mortgages have an interest rate that will change over the life of the loan. They often come with a low introductory rate, which after a predetermined time period changes to a rate tied to market indices.

•   Extended-term mortgages. A subprime mortgage may have a term of 40 years instead of the typical 30-year term. Add to this the higher interest rate, and borrowers pay much more for the mortgage over the life of the loan.

•   Interest-only mortgages. Interest-only loans offer borrowers the ability to only repay the interest part of the loan for the first part of the repayment period. Borrowers have the option of not repaying any principal for five to 10 years. The annual percentage rate is typically higher than for conventional loans. Origination fees may be higher as well.

The “dignity mortgage,” a new kind of subprime loan, could help borrowers who expect to redeem their creditworthiness. The borrower makes a down payment of about 10% and agrees to pay a higher rate of interest for a number of years, typically five. After that period of on-time payments, the amount paid toward interest goes toward reducing the mortgage balance, and the rate is lowered to the prime rate.

Subprime vs Prime Mortgages

Subprime mortgages have many of the same features as prime mortgages, but there are some key differences.

Applying for Subprime Mortgages

Most lenders require a minimum credit score of 620 for a conventional mortgage, but there are lenders out there that specialize in subprime mortgages.

Generally, applying for a subprime mortgage is much the same as applying for a traditional mortgage. Lenders will check your credit and analyze your finances. They will ask for proof of income, verification of employment, and documentation of assets (such as bank statements). They may also ask for documentation regarding your debts or negative items in your credit reports.

Mortgage rates for subprime loans will vary depending on the prime rate, lending institution, the home’s location, the loan amount, the down payment, credit score, the interest rate type, the loan term, and loan type. The rate is typically much higher than a prime mortgage’s.

A mortgage calculator can help you find out what your monthly payments will be with a subprime mortgage. Simply adjust your mortgage rate to the one quoted by a lender for your credit situation.

Alternatives to Subprime Mortgages

Subprime loans are not the only option for borrowers with fair credit scores. Borrowers with credit issues can also look at mortgages backed by the FHA and the Department of Veterans Affairs (VA).

FHA loans have more flexible standards for borrowers than conventional loans. Though borrowers can obtain a mortgage with a credit score as low as 500 (assuming they have a 10% down payment), FHA loans are not considered subprime mortgages. Instead, FHA loans are government-backed loans that provide mortgage insurance to FHA-approved lenders to use if the borrower defaults on the loan.

For many borrowers with good credit and a moderate down payment, FHA loans are more expensive and don’t make sense. However, for borrowers with lower credit scores and smaller down payments, an FHA loan could be the best option.

VA loans have no minimum credit requirement, but instead, lenders review the entire loan profile. The VA advises lenders to consider credit satisfactory if 12 months of payments have been made after the last derogatory credit item (in cases not involving bankruptcy).


💡 Quick Tip: Keep in mind that FHA loans are available for your primary residence only. Investment properties and vacation homes are not eligible.1

The Takeaway

Subprime mortgages allow borrowers with impaired credit to unlock the door to a home, but to mitigate risk, the lender may charge more for the loan. Borrowers considering this type of mortgage would be smart to look closely at terms and costs, and to also consider other options such as FHA loans.

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/shapecharge

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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