Stephanie Horan is a lead data analyst for the MarketWatch Guides Team, specializing in home buying and personal finance. Beginning her career in asset management and transitioning to data journalism, Stephanie is a Certified Educator of Personal Finance (CEPF®). She is passionate about translating data to provide digestible insights for a broad audience. Her studies have been featured in CNBC, Bloomberg and the New York Times, among many others.
Edited By:
Andrew Dunn
Andrew Dunn is a veteran journalist with more than a decade of experience in the business and finance arena. Before joining our team, Andrew was a reporter and editor at North Carolina news organizations including The Charlotte Observer and the StarNews in Wilmington. In those roles, his work was cited numerous times by the North Carolina Press Association and the Society of Business Editors and Writers. Andrew completed the business journalism certificate program from the University of North Carolina at Chapel Hill.
Editor’s Note: Parts of this story were auto-populated using data from Curinos, a mortgage research firm that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our methodology here.
Mortgage rates rose slightly in the first week of 2024, with the 30-year fixed-rate mortgage increasing by 0.10 percentage points, according to data from Curinos analyzed by MarketWatch Guides.
This slight increase took place in the midst of mixed economic signals. The Labor Department reported that employers added 216,000 jobs in December, exceeding economists’ expectations, while the stock market had a rocky start to the beginning of the year. Through last Friday, the S&P is down roughly 1% year-to-date.
Economists with the Mortgage Bankers Association are still confident that rates will fall over the coming months. The next Federal Reserve meeting is scheduled for the end of January, and though rates may be held steady at that meeting, the board previously indicated that they expect three rate cuts throughout the year.
Here are today’s average mortgage rates:
30-year fixed mortgage rate: 7.12%
15-year fixed mortgage rate: 6.41%
5/6 ARM mortgage rate: 6.87%
Jumbo mortgage rate: 7.01%
Current Mortgage Rates
Product
Rate
Last Week
Change
30-Year Fixed Rate
7.12%
7.18%
-0.06
15-Year Fixed Rate
6.41%
6.40%
+0.01
5/6 ARM
6.87%
7.00%
-0.13
7/6 ARM
7.04%
7.15%
-0.11
10/6 ARM
7.15%
7.25%
-0.10
30-Year Fixed Rate Jumbo
7.01%
7.07%
-0.06
30-Year Fixed Rate FHA
6.78%
6.87%
-0.09
30-Year Fixed Rate VA
6.78%
6.86%
-0.08
Disclaimer: The rates above are based on data from Curinos, LLC. All rate data is accurate as of Friday, January 12, 2024. Actual rates may vary.
>> View historical mortgage rate trends
Mortgage Rates for Home Purchase
30-year fixed-rate mortgages are down, -0.06
The average 30-year fixed-mortgage rate is 7.12%. Since the same time last week, the rate is down, changing -0.06 percentage points.
At the current average rate, you’ll pay $673.38 per month in principal and interest for every $100,000 you borrow. You’re paying less compared to last week when the average rate was 7.18%.
15-year fixed-rate mortgages are up, +0.01
The average rate you’ll pay for a 15-year fixed-mortgage is 6.41%, an increase of+0.01 percentage points compared to last week.
Monthly payments on a 15-year fixed-mortgage at a rate of 6.41% will cost approximately $866.17 per $100,000 borrowed. With the rate of 6.40% last week, you would’ve paid $865.62 per month.
5/6 adjustable-rate mortgages are down,-0.13
The average rate on a 5/6 adjustable rate mortgage is 6.87%, a decrease of-0.13 percentage points over the last seven days.
Adjustable-rate mortgages, commonly referred to as ARMs, are mortgages with a fixed interest rate for a set period of time followed by a rate that adjusts on a regular basis. With a 5/6 ARM, the rate is fixed for the first 5 years and then adjusts every six months over the next 25 years.
Monthly payments on a 5/6 ARM at a rate of 6.87% will cost approximately $656.59 per $100,000 borrowed over the first 5 years of the loan.
Jumbo loan interest rates are down, -0.06
The average jumbo mortgage rate today is 7.01%, a decrease of-0.06 percentage points over the past week.
Jumbo loans are mortgages that exceed loan limits set by the Federal Housing Finance Agency (FHFA) and funding criteria of Freddie Mac and Fannie Mae. This generally means that the amount of money borrowed is higher than $726,200.
Product
Monthly P&I per $100,000
Last Week
Change
30-Year Fixed Rate
$673.38
$677.43
-$4.05
15-Year Fixed Rate
$866.17
$865.62
+$0.55
5/6 ARM
$656.59
$665.30
-$8.71
7/6 ARM
$667.99
$675.41
-$7.42
10/6 ARM
$675.41
$682.18
-$6.77
30-Year Fixed Rate Jumbo
$665.97
$670.01
-$4.04
30-Year Fixed Rate FHA
$650.59
$656.59
-$6.00
30-Year Fixed Rate VA
$650.59
$655.93
-$5.34
Note: Monthly payments on adjustable-rate mortgages are shown for the first five, seven and 10 years of the loan, respectively.
Factors That Affect Your Mortgage Rate
Mortgage rates change frequently based on the economic environment. Inflation, the federal funds rate, housing market conditions and other factors all play into how rates move from week-to-week and month-to-month.
But outside of macroeconomic trends, several other factors specific to the borrower will affect the mortgage interest rate. They include:
Financial situation: Mortgage lenders use past financial decisions of borrowers as a way to evaluate the risk of loaning money.
Loan amount and structure: The amount of money that bank or mortgage lender loans and its structure (including both the term and whether its a fixed-rate or adjustable-rate).
Location: Mortgage rates vary by where you are buying a home. Areas with more lenders, and thus more competition, may have lower rates. Foreclosure laws can also impact a lender’s risk, affecting rates.
Whether borrowers are first-time homebuyers: Oftentimes first-time homebuyer programs will offer new homeowners lower rates.
Lenders: Banks, credit unions and online lenders all may offer slightly different rates depending on their internal determination.
How To Shop for the Best Mortgage Rate
Comparison shopping for a mortgage can be overwhelming, but it’s shown to be worth the effort. Homeowners may be able to save between $600 and $1,200 annually by shopping around for the best rate, researchers found in a recent study by Freddie Mac. That’s why we put together steps on how to shop for the best mortgage rate.
1. Check credit scores and credit reports
A borrower’s credit situation will likely determine the type of mortgage they can pursue, as well as their rate. Conventional loans are typically only offered to borrowers with a credit score of 620 or higher, while FHA loans may be the best option for borrowers with a FICO score between 500 and 619. Additionally, individuals with higher credit scores are more likely to be offered a lower mortgage interest rate.
Mortgage lenders often review scores from the three major credit bureaus: Equifax, Experian and TransUnion. By viewing your scores ahead of lenders considering you for a loan, you can check for errors and even work to improve your score by paying down balances and limiting new credit cards and loans.
2. Know the options
There are four standard mortgage programs: conventional, FHA, VA and USDA. To get the best mortgage rate and increase your odds of approval, it’s important for potential borrowers to do their research and apply for the mortgage program that best fits their financial situation.
The table below describes each program, highlighting minimum credit score and down payment requirements.
Though conventional mortgages are most common, borrowers will also need to consider their repayment plan and term. Rates can be either fixed or adjustable and terms can range from 10 to 30 years, though most homeowners opt for a 15- or 30-year mortgage.
3. Compare quotes across multiple lenders
Shopping around for a mortgage goes beyond comparing rates online. We recommend reaching out to lenders directly to see the “real” rate as figures listed online may not be representative of a borrower’s particular situation. While most experts recommend getting quotes from three to five lenders, there is no limit on the number of mortgage companies you can apply with. In many cases, lenders will allow borrowers to prequalify for a mortgage and receive a tentative loan offer with no impact to their credit score.
After gathering your loan documents – including proof of income, assets and credit – borrowers may also apply for pre-approval. Pre-approval will let them know where they stand with lenders and may also improve negotiating power with home sellers.
4. Review loan estimates
To fully understand which lender is offering the cheapest loan overall, take a look at the loan estimate provided by each lender. A loan estimate will list not only the mortgage rate, but also a borrower’s annual percentage rate (APR), which includes the interest rate and other lender fees such as closing costs and discount points.
By comparing loan estimates across lenders, borrowers can see the full breakdown of their possible costs. One lender may offer lower interest rates, but higher fees and vice versa. Looking at the loan’s APR can give you a good apples-to-apples comparison between lenders that takes into account both rates and fees.
5. Consider negotiating with lenders on rates
Mortgage lenders want to do business. This means that borrowers may use competing offers as leverage to adjust fees and interest rates. Many lenders may not lower their offered rate by much, but even a few basis points may save borrowers more than they might think in the long run. For instance, the difference between 6.8% and 7.0% on a 30-year, fixed-rate $100,000 mortgage is roughly $5,000 over the life of the loan.
Expert Forecasts for Mortgage Rates
With mortgage interest rates climbing steadily throughout the first half of 2023 and exceeding 7%, prospective homeowners may be wondering: Will there be any relief going forward? Some experts are optimistic.
Fannie Mae and the Mortgage Bankers Association (MBA) project that rates will fall going into 2024 and throughout next year. In fact, the MBA predicts that rates will end 2024 at 6.1%.
More Mortgage Resources
Methodology
Every weekday, MarketWatch Guides provides readers with the latest rates on 11 different types of mortgages. Data for these daily averages comes from Curinos, LLC, a leading provider of mortgage research that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our comprehensive methodology here.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
The average rate on 30-year fixed mortgages ticked down to 6.94% this week from 6.96% the previous week, according to Bankrate’s weekly national survey of large lenders.
Just a few months ago, the average rate on 30-year home loans topped 8%. But mortgage rates dropped after the Federal Reserve indicated it’d begin cutting its key rate in 2024. The central bank’s long-awaited pivot was spurred by a number of factors, including a slowing job market and signs that the Fed’s ongoing war on inflation is working.
Meanwhile, yields on 10-year Treasury bonds, an informal benchmark for 30-year mortgage rates, have dropped from 5% to around 4% in recent weeks.
The Fed doesn’t directly control mortgage rates, but it plays a pivotal role. The central bank sets policy that affects the cost of home loans. At the conclusion of its most recent meeting on Dec. 13, the Federal Open Markets Committee decided to leave rates unchanged.
“The recent decline in rates has given the housing market some cause for optimism going into 2024, but purchase applications have not yet picked up in response,” says Joel Kan, deputy chief economist at the Mortgage Bankers Association.
The rate cool-off somewhat eases the housing affordability squeeze. It also bodes well for a housing market that has been sluggish since 2022. However, a still-strong economy has undermined hopes that the Fed will begin cutting rates soon.
“The economy’s not slowing down as quickly as the Fed would hope,” says Scott Haymore, head of pricing and secondary markets at TD Bank.
What happened to mortgage rates this week
The 30-year fixed mortgages in this week’s survey had an average total of 0.34 discount and origination points. Discount points are a way for you to reduce their mortgage rate, while origination points are fees a lender charges to create, review and process your loan.
Over the past 52 weeks, the benchmark 30-year fixed-rate mortgage averaged 7%. A year ago, the 30-year fixed-rate mortgage was 6.55%. Four weeks ago, that rate was 7.21%. The 30-year fixed-rate average for this week is 0.67%age points higher than the 52-week low of 6.27%.
As for other types of loans:
—The 15-year fixed-rate mortgage was 6.19%, down from 6.21% from a week ago.
—The 5/6 adjustable-rate mortgage (ARM) was 6.95%, down from 6.96% a week ago.
—The 30-year fixed-rate jumbo mortgage was 6.94%, down from 7% a week ago.
How mortgage rates affect home affordability
The national median family income for 2023 was $96,300, according to the U.S. Department of Housing and Urban Development, and the median price of an existing home sold in November 2023 was $387,600, according to the National Association of Realtors. Based on a 20% down payment and a mortgage rate of 6.94%, the monthly payment of $2,050 amounts to 26% of the typical family’s monthly income.
The steep climb in mortgage rates over the past two years has squeezed affordability and sparked a slowdown in home sales. First-time buyers are especially challenged by this market. Home prices haven’t fallen significantly, and values are unlikely to decline, given the shortage of homes for sale.
“Higher mortgage rates have a dual impact on the housing market: reducing affordability for buyers and strengthening the rate lock-in for sellers,” says Odeta Kushi, deputy chief economist at First American. “The combination of reduced affordability and increased strength of the rate lock-in effect is likely to continue to suppress home sales because you can’t buy what’s not for sale, even if you can afford it.”
Reflecting the affordability squeeze, the median household income for homebuyers jumped to $107,000 in 2023 from $88,000 last year, according to the National Association of Realtors’ 2023 Profile of Home Buyers and Sellers.
Will mortgage rates go down?
Economists expected to see mortgage rates decrease dramatically by now, but the resilience of the U.S. economy had thrown a wrinkle into those predictions. Things finally seem to be cooling, especially 10-year Treasury yields.
Mortgage rates are also chained to inflation, a metric the Fed has been moving to control. At its most recent meetings, the central bank opted to keep rates unchanged. While the Fed doesn’t directly set fixed mortgage rates, it does set the tone of the interest rate environment.
Methodology
The Bankrate.com national survey of large lenders is conducted weekly. To conduct the National Average survey, Bankrate obtains rate information from the 10 largest banks and thrifts in 10 large U.S. markets. In the Bankrate.com national survey, our Market Analysis team gathers rates and/or yields on banking deposits, loans and mortgages. We’ve conducted this survey in the same manner for more than 30 years, and because it’s consistently done the way it is, it gives an accurate national apples-to-apples comparison. Our rates differ from other national surveys, in particular Freddie Mac’s weekly published rates. Each week Freddie Mac surveys lenders on the rates and points based on first-lien prime conventional conforming home purchase mortgages with a loan-to-value of 80%. “Lenders surveyed each week are a mix of lender types — thrifts, credit unions, commercial banks and mortgage lending companies — is roughly proportional to the level of mortgage business that each type commands nationwide,” according to Freddie Mac.
Stephanie Horan is a lead data analyst for the MarketWatch Guides Team, specializing in home buying and personal finance. Beginning her career in asset management and transitioning to data journalism, Stephanie is a Certified Educator of Personal Finance (CEPF®). She is passionate about translating data to provide digestible insights for a broad audience. Her studies have been featured in CNBC, Bloomberg and the New York Times, among many others.
Edited By:
Andrew Dunn
Andrew Dunn is a veteran journalist with more than a decade of experience in the business and finance arena. Before joining our team, Andrew was a reporter and editor at North Carolina news organizations including The Charlotte Observer and the StarNews in Wilmington. In those roles, his work was cited numerous times by the North Carolina Press Association and the Society of Business Editors and Writers. Andrew completed the business journalism certificate program from the University of North Carolina at Chapel Hill.
Editor’s Note: Parts of this story were auto-populated using data from Curinos, a mortgage research firm that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our methodology here.
Mortgage rates rose slightly in the first week of 2024, with the 30-year fixed-rate mortgage increasing by 0.10 percentage points, according to data from Curinos analyzed by MarketWatch Guides.
This slight increase took place in the midst of mixed economic signals. The Labor Department reported that employers added 216,000 jobs in December, exceeding economists’ expectations, while the stock market had a rocky start to the beginning of the year. Through last Friday, the S&P is down roughly 1% year-to-date.
Economists with the Mortgage Bankers Association are still confident that rates will fall over the coming months. The next Federal Reserve meeting is scheduled for the end of January, and though rates may be held steady at that meeting, the board previously indicated that they expect three rate cuts throughout the year.
Here are today’s average mortgage rates:
30-year fixed mortgage rate: 7.18%
15-year fixed mortgage rate: 6.41%
5/6 ARM mortgage rate: 6.90%
Jumbo mortgage rate: 7.03%
Current Mortgage Rates
Product
Rate
Last Week
Change
30-Year Fixed Rate
7.18%
7.19%
-0.01
15-Year Fixed Rate
6.41%
6.38%
+0.03
5/6 ARM
6.90%
6.94%
-0.04
7/6 ARM
7.11%
7.11%
0.00
10/6 ARM
7.19%
7.19%
0.00
30-Year Fixed Rate Jumbo
7.03%
7.08%
-0.05
30-Year Fixed Rate FHA
6.84%
6.90%
-0.06
30-Year Fixed Rate VA
6.85%
6.87%
-0.02
Disclaimer: The rates above are based on data from Curinos, LLC. All rate data is accurate as of Wednesday, January 10, 2024. Actual rates may vary.
>> View historical mortgage rate trends
Mortgage Rates for Home Purchase
30-year fixed-rate mortgages are down, -0.01
The average 30-year fixed-mortgage rate is 7.18%. Since the same time last week, the rate is down, changing -0.01 percentage points.
At the current average rate, you’ll pay $677.43 per month in principal and interest for every $100,000 you borrow. You’re paying less compared to last week when the average rate was 7.19%.
15-year fixed-rate mortgages are up, +0.03
The average rate you’ll pay for a 15-year fixed-mortgage is 6.41%, an increase of+0.03 percentage points compared to last week.
Monthly payments on a 15-year fixed-mortgage at a rate of 6.41% will cost approximately $866.17 per $100,000 borrowed. With the rate of 6.38% last week, you would’ve paid $864.52 per month.
5/6 adjustable-rate mortgages are down,-0.04
The average rate on a 5/6 adjustable rate mortgage is 6.90%, a decrease of-0.04 percentage points over the last seven days.
Adjustable-rate mortgages, commonly referred to as ARMs, are mortgages with a fixed interest rate for a set period of time followed by a rate that adjusts on a regular basis. With a 5/6 ARM, the rate is fixed for the first 5 years and then adjusts every six months over the next 25 years.
Monthly payments on a 5/6 ARM at a rate of 6.90% will cost approximately $658.60 per $100,000 borrowed over the first 5 years of the loan.
Jumbo loan interest rates are down, -0.05
The average jumbo mortgage rate today is 7.03%, a decrease of-0.05 percentage points over the past week.
Jumbo loans are mortgages that exceed loan limits set by the Federal Housing Finance Agency (FHFA) and funding criteria of Freddie Mac and Fannie Mae. This generally means that the amount of money borrowed is higher than $726,200.
Product
Monthly P&I per $100,000
Last Week
Change
30-Year Fixed Rate
$677.43
$678.11
-$0.68
15-Year Fixed Rate
$866.17
$864.52
+$1.65
5/6 ARM
$658.60
$661.28
-$2.68
7/6 ARM
$672.71
$672.71
$0.00
10/6 ARM
$678.11
$678.11
$0.00
30-Year Fixed Rate Jumbo
$667.32
$670.68
-$3.36
30-Year Fixed Rate FHA
$654.59
$658.60
-$4.01
30-Year Fixed Rate VA
$655.26
$656.59
-$1.33
Note: Monthly payments on adjustable-rate mortgages are shown for the first five, seven and 10 years of the loan, respectively.
Factors That Affect Your Mortgage Rate
Mortgage rates change frequently based on the economic environment. Inflation, the federal funds rate, housing market conditions and other factors all play into how rates move from week-to-week and month-to-month.
But outside of macroeconomic trends, several other factors specific to the borrower will affect the mortgage interest rate. They include:
Financial situation: Mortgage lenders use past financial decisions of borrowers as a way to evaluate the risk of loaning money.
Loan amount and structure: The amount of money that bank or mortgage lender loans and its structure (including both the term and whether its a fixed-rate or adjustable-rate).
Location: Mortgage rates vary by where you are buying a home. Areas with more lenders, and thus more competition, may have lower rates. Foreclosure laws can also impact a lender’s risk, affecting rates.
Whether borrowers are first-time homebuyers: Oftentimes first-time homebuyer programs will offer new homeowners lower rates.
Lenders: Banks, credit unions and online lenders all may offer slightly different rates depending on their internal determination.
How To Shop for the Best Mortgage Rate
Comparison shopping for a mortgage can be overwhelming, but it’s shown to be worth the effort. Homeowners may be able to save between $600 and $1,200 annually by shopping around for the best rate, researchers found in a recent study by Freddie Mac. That’s why we put together steps on how to shop for the best mortgage rate.
1. Check credit scores and credit reports
A borrower’s credit situation will likely determine the type of mortgage they can pursue, as well as their rate. Conventional loans are typically only offered to borrowers with a credit score of 620 or higher, while FHA loans may be the best option for borrowers with a FICO score between 500 and 619. Additionally, individuals with higher credit scores are more likely to be offered a lower mortgage interest rate.
Mortgage lenders often review scores from the three major credit bureaus: Equifax, Experian and TransUnion. By viewing your scores ahead of lenders considering you for a loan, you can check for errors and even work to improve your score by paying down balances and limiting new credit cards and loans.
2. Know the options
There are four standard mortgage programs: conventional, FHA, VA and USDA. To get the best mortgage rate and increase your odds of approval, it’s important for potential borrowers to do their research and apply for the mortgage program that best fits their financial situation.
The table below describes each program, highlighting minimum credit score and down payment requirements.
Though conventional mortgages are most common, borrowers will also need to consider their repayment plan and term. Rates can be either fixed or adjustable and terms can range from 10 to 30 years, though most homeowners opt for a 15- or 30-year mortgage.
3. Compare quotes across multiple lenders
Shopping around for a mortgage goes beyond comparing rates online. We recommend reaching out to lenders directly to see the “real” rate as figures listed online may not be representative of a borrower’s particular situation. While most experts recommend getting quotes from three to five lenders, there is no limit on the number of mortgage companies you can apply with. In many cases, lenders will allow borrowers to prequalify for a mortgage and receive a tentative loan offer with no impact to their credit score.
After gathering your loan documents – including proof of income, assets and credit – borrowers may also apply for pre-approval. Pre-approval will let them know where they stand with lenders and may also improve negotiating power with home sellers.
4. Review loan estimates
To fully understand which lender is offering the cheapest loan overall, take a look at the loan estimate provided by each lender. A loan estimate will list not only the mortgage rate, but also a borrower’s annual percentage rate (APR), which includes the interest rate and other lender fees such as closing costs and discount points.
By comparing loan estimates across lenders, borrowers can see the full breakdown of their possible costs. One lender may offer lower interest rates, but higher fees and vice versa. Looking at the loan’s APR can give you a good apples-to-apples comparison between lenders that takes into account both rates and fees.
5. Consider negotiating with lenders on rates
Mortgage lenders want to do business. This means that borrowers may use competing offers as leverage to adjust fees and interest rates. Many lenders may not lower their offered rate by much, but even a few basis points may save borrowers more than they might think in the long run. For instance, the difference between 6.8% and 7.0% on a 30-year, fixed-rate $100,000 mortgage is roughly $5,000 over the life of the loan.
Expert Forecasts for Mortgage Rates
With mortgage interest rates climbing steadily throughout the first half of 2023 and exceeding 7%, prospective homeowners may be wondering: Will there be any relief going forward? Some experts are optimistic.
Fannie Mae and the Mortgage Bankers Association (MBA) project that rates will fall going into 2024 and throughout next year. In fact, the MBA predicts that rates will end 2024 at 6.1%.
More Mortgage Resources
Methodology
Every weekday, MarketWatch Guides provides readers with the latest rates on 11 different types of mortgages. Data for these daily averages comes from Curinos, LLC, a leading provider of mortgage research that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our comprehensive methodology here.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
Personal loan amounts range from $2,000 to $100,000, which may not be enough to buy a regular home but could work if you need a small mortgage for a tiny or mobile home.
Personal loan interest isn’t tax deductible like a mortgage.
You can typically receive faster funding with a personal loan than a mortgage.
With median home sale prices approaching $400,000 at the end of 2023, a personal loan typically won’t give you the borrowing power you need to buy a home compared to a regular mortgage, However, if you’re in the market for a tiny home or a manufactured home, a personal loan may be a great financing choice. If not, a personal loan can help you tidy up your finances so you can qualify for a mortgage to buy your dream home.
Can you use a personal loan to buy a house?
Yes, if you can find a home at a price within standard personal loan amount limits (typically between $2,000 and $100,000) and can afford the payment timeline. That’s probably not enough to buy a regular home, but it may be perfect if you need a small mortgage for a tiny home or a mobile home.
Using a personal loan to buy a tiny home
Personal loans may be the right financing fit to buy tiny homes with prices averaging between $30,000 and $70,000. Mortgage lenders often shy away from loans below $100,000 because they aren’t profitable. In other cases, tiny homes don’t fit minimum property requirements. For example, tiny homes are typically less than 400 square feet, which is less than the Federal Housing Administration’s minimum.
Personal loans are typically unsecured, which means you won’t risk losing your home if you can’t make the payments. One disadvantage of a loan versus a mortgage is you can’t write off personal loan interest because it’s not tax-deductible like mortgage interest.
Using a personal loan to finance a manufactured home
On average, you’ll pay between $86,100 and $158,633 to buy a manufactured home, which means you could use a personal loan to buy one on the lower end of the price range. If you don’t plan to attach your home to land that you own, you may not be able to get mortgage financing, which makes personal loans a good option.
A personal loan may also be cheaper than a chattel loan, an expensive type of financing used to buy mobile homes that aren’t considered real estate.
6 ways you can use a personal loan to buy a house
If you’re buying a standard family home, you can use a personal loan to spruce up your finances to help you qualify for a home loan.
If you’re saddled with multiple credit card payments at high interest rates, you can use a personal loan for debt consolidation to combine them all into one monthly payment. Rates are typically lower than credit cards, and you’ll reduce your credit utilization ratio, which has a major impact on your credit score.
If your scores improve, lower monthly payments could help you qualify for a higher sales price or a better interest rate. Having fewer monthly payments reduces the chances of a late payment, which can really damage your credit score.
You’ll need a credit score of 780 or higher to get the best mortgage interest rates with the lowest closing costs. You could see a big boost to your credit score if you pay off maxed-out credit cards with a debt consolidation loan.
Besides allowing you to qualify for a higher-priced house, a lower interest rate can save you thousands of dollars in interest charges over the life of a 30-year mortgage.
If you took out an auto loan with a short term (12 to 36 months) to buy a new car, the payment will affect your debt-to-income (DTI) ratio, which measures how much total debt you have compared to your income. The higher your DTI ratio, the lower the mortgage amount you can qualify for.
If you’ve found your forever home but have been told your mortgage DTI ratio is too high, consider replacing your short-term auto loan with a longer-term personal loan. Keep in mind that you’ll end up paying more in interest if you choose a longer loan term than the loan you’re paying off.
If you don’t have enough saved up for a down payment for a house, consider putting the savings from steps one and two above into a down payment savings account. The more you put down, the lower your monthly mortgage payment will be. If you can swing a 20% down payment, you’ll avoid monthly mortgage insurance on a conventional mortgage.
Mortgage underwriting guidelines don’t allow you to use money from an unsecured loan like a credit card or personal loan toward your down payment or closing cost requirement to buy a home. However, there is an exception if your loan is secured to an asset like a car.
Mortgage lenders will allow you to use funds from a secured personal loan to qualify if you meet the DTI ratio requirements with the new payment. You’ll also need to provide paperwork to prove you own the asset and document the value of the asset with some third-party service (like Kelly Blue Book for a car loan).
If you’re trying to buy a home in a competitive market, your agent may recommend an all-cash offer, which may involve bidding more than the asking price on the home. If you’re short of funds to make an offer and need a quick path to extra cash, a personal loan may be worth a look.
Many personal loan lenders can get you cash within a day or two, which keeps you in the running against other cash buyers. If you want to pay the personal loan off once you’ve purchased the home, you borrow the funds against your home’s equity with a home equity loan, HELOC or a cash-out refinance.
Pros and cons of using a personal loan to buy a house
Pros
Replace multiple debts with one easy-to-remember monthly payment.
Improve your credit scores by paying off revolving credit card debt.
No assets are required for collateral.
Faster funding times than most mortgage products.
Can use debt consolidation savings to build a down payment fund.
Cons
Payment may affect your DTI ratio.
Rates are often higher than home equity loan and HELOC rates.
Shorter terms mean higher monthly payments than home equity products.
Potential prepayment penalties and high origination fees.
Personal loan interest isn’t tax-deductible for a home purchase.
Can you use a personal loan for a down payment?
The answer is a definite no if it’s an unsecured personal loan. However, as mentioned above, if the personal loan is secured by an asset like a car, collectible, artwork or other asset, then lenders will usually allow the borrowed funds to count toward your down payment. You’ll need to qualify with the extra payment and prove you own the secured asset.
When you think about retirement planning, you may feel like you’re doing alright, especially if you’re contributing part of your monthly paycheck to your employer-sponsored 401(k) plan. You may even have visions of growing old by the ocean or tapping into your Bohemian side with some global travel.
But to truly live the retired life you dream of, rather than scraping the bottom of your savings accounts, you need to be well-prepared. While a 401(k) is a great start, there are other tools you can take advantage of to diversify and maximize your retirement savings.
That’s where a Roth IRA comes in.
This tax-friendly retirement account can not only bolster your retirement money but can also help relieve your future tax burden. An IRA does come with a few rules attached to it, plus some eligibility requirements. However, when used wisely, it can really work to your advantage when it comes time to retire.
We’ll take you step-by-step through everything you need to know to make sure you qualify and how to use a Roth IRA to its fullest.
What is a Roth IRA?
A Roth IRA (Individual Retirement Account) is a type of retirement savings account that allows you to save and invest money for retirement on a tax-advantaged basis.
Contributions to a Roth IRA are made with after-tax dollars, meaning you cannot claim a tax deduction for the money you contribute. However, once the money is in the account, it can grow tax-free, and you can withdraw it tax-free in retirement.
This can be extremely beneficial because the money you contribute to a Roth IRA should grow (ideally substantially) between when you put cash in and when you start to take it out. But since you pay income taxes on it the first time around, you don’t have to do it again, even though the amount is larger.
You get to pick the investments in which to place your Roth IRA funds, such as:
How does a Roth IRA work?
A Roth IRA comes with many tax benefits, which is why it’s so popular these days. Even if you have a 401(k), it’s a great tax-advantaged addition to your retirement plan. And if you’re self-employed or don’t have a 401(k) at work, it’s a good start to investing for your retirement goals.
Here’s how a Roth IRA works:
Eligibility: To be eligible to contribute to a Roth IRA, you must have earned income and your income must fall below certain thresholds.
Contributions: You can contribute up to a certain amount each year to a Roth IRA, depending on your age and income. Contributions are made with after-tax dollars and are not tax-deductible.
Investment options: You can invest the money in your Roth IRA in a variety of ways, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
Tax benefits: Earnings on your investments grow tax-free, and you can withdraw your contributions and earnings tax-free in retirement as long as you meet certain conditions.
Withdrawals: You can withdraw your contributions to a Roth IRA at any time without penalty. However, you may owe taxes and a penalty if you withdraw your earnings before you reach age 59 1/2 and have not held the account for at least five years.
Roth IRAs can be a valuable tool for saving for retirement, especially for people who expect to be in a higher tax bracket in retirement than they are now.
How much can you contribute to a Roth IRA?
As long as you meet certain income requirements (which we’ll discuss shortly), you can contribute up to $6,000 a year to your Roth IRA. That number jumps to $7,000 if you’re at least 50 years old, helping you catch up financially and get ready faster as you approach retirement.
Plus, there are no minimum Roth IRA contribution limits when you turn 70 ½. So, you can use your Roth IRA as a way to provide your family with an inheritance.
Ready to retire early? A Roth IRA can help.
You can start making tax-free and penalty-free IRA withdrawals before you reach the traditional retirement age because you’ve already paid taxes. However, you have to pay taxes and potentially penalty fees on your earnings if you withdraw those early.
Plus, Roth IRAs aren’t just for retirement.
You can also use your funds for qualified education expenses without having to pay penalties or taxes. So, you can help pay for your own or your child’s college tuition, just as you would with a 529 plan (or in addition to it).
Although there are contribution limits, you get a lot of flexibility when you choose a Roth IRA. And when you have financial goals at any stage of life, flexibility is key.
What’s the difference between a traditional IRA and a Roth IRA?
If you’re at all familiar with retirement terminology, you may have heard of an IRA before. But there are a few key differences between a Roth IRA and a traditional IRA.
The most significant difference is when you pay your taxes. Unlike Roth IRAs, a traditional IRA allows you to take a tax deduction the year you actually contribute. So if you’re attempting to drop into a lower tax bracket or lower your overall tax payment, your traditional IRA contribution can help you do that.
Of course, there’s a catch.
When you start to take withdrawals when you retire, you’ll have to pay taxes on the full amount — including your earnings. But that’s not necessarily a bad thing.
If you’re established in your career and already earn a lot of money, you may expect your annual income to drop when you retire. You’re probably not going to withdraw your entire balance at once, so your tax rate might not be that high compared to where you are now.
Minimum Distributions
Speaking of making withdrawals from your account, you have to start taking the required minimum distributions once you hit the age of 70 ½. The minimum amount is based on a formula from the IRS comparing your age to your life expectancy.
If you want to take out funds from traditional IRAs before you reach the age of 59½, you’ll have to pay a 10% penalty on top of your income tax.
Still, like most investments, it’s good to have a diverse mix of products to help you now and in the future. You may want to consider having both a traditional IRA and a Roth IRA, particularly if you want to start lowering your annual federal tax burden.
Tax-Free Distributions
You must have a Roth IRA account opened for 5 tax years to be able to take any distributions, including earnings, that are tax-free. Furthermore, you are only eligible to take tax-free distributions for death or disability, after age 59-1/2, or for a first-time home purchase.
Roth IRA Eligibility Requirements
Unfortunately, there are restrictions on opening a Roth IRA, particularly for high-income earners. Depending on how much you make, you may be restricted on how much you can contribute, or you may not be able to make any contributions at all. Furthermore, you can only contribute earned income to a Roth IRA.
So, where do cutoffs start?
Single Tax Filer
Let’s look at single tax filers first.
For single tax filers and heads of household, you’re allowed to make the maximum contribution if you earn no more than $146,000. You can contribute a reduced amount if you earn more than $146,000, but less than $161,000. If you earn $161,000 or more, however, you can’t make any Roth IRA contributions.
Joint Tax Filer
Now let’s take a look at those married filing jointly.
You can make the maximum contribution if you earn up to $230,000 and a reduced amount if you earn between $$230,000 and $240,000. Once your annual income reaches $240,000 or more, you’re not eligible to contribute anything. Your modified adjusted gross income (MAGI) is what is used to determine IRA eligibility.
Depending on your anticipated income track over the course of your career, it may be worth opening a Roth IRA as soon as possible. That way, you can ensure that you contribute as much as possible while you still meet the requirements. You also give your investments as much time as possible to grow and compound before you’re ready to make withdrawals.
And since you can use a Roth IRA for a greater range of purposes than other types of retirement accounts, you give yourself greater financial flexibility in the future. It isn’t just about setting up a contribution each year and forgetting about it until you retire. Instead, a Roth IRA can be an active part of your near-term and long-term financial plans, like going back to school or retiring early.
How to Open a Roth IRA
Just about anywhere you conduct your financial business, whether it’s at a bank, credit union, online broker, or even a robo-advisor. Compare your options to make sure you’re getting low fees and good customer service.
Check for mutual funds with no transaction fees and ETFs that are commission-free. Some financial brokers still charge high prices for these fees. So, it’s important to make sure that you’re choosing one who will save you money in the long run. After all, those fees can really start to add up over decades of managing your Roth IRA.
Most brokers also allow you to rollover other accounts into your IRAs (both traditional IRAs and Roth IRAs). If this is a service you may need somewhere down the road, make sure your IRA broker is sophisticated enough to handle it.
Some robo-advisors, for example, may not accept rollovers. And if you leave a job where you’ve had a 401(k), you’ll want to make sure you have somewhere to put it once you’re gone.
With a bit of research and comparison, you can find a convenient, low-cost way to manage your Roth IRA over the years.
Where to Open a Roth IRA
To open up a Roth IRA, you need to select a brokerage firm. You may be able to do this at a financial institution you already work with, or you could explore other options. Both online and brick-and-mortar banks can serve as a broker. It really depends on where you want to house your investment and the type of fee structure you prefer.
Start with a bank you already use, but don’t be afraid to compare their offerings and fees to other financial institutions. It’s important to maximize your earnings so that you can retire comfortably.
How do you manage a Roth IRA?
What exactly do you need to do once you’ve opened a Roth IRA? You want to start by making contributions. You can roll over funds from a traditional 401(k) or traditional IRA, but you’ll be required to pay taxes on that money, so make sure you can handle that extra financial burden.
For 2024, you can still make a contribution to your Roth IRA for the previous year until the tax filing deadline of the following year. For instance, if you haven’t contributed the maximum amount to your Roth IRA by December 31, 2023, you have until the federal tax filing deadline in 2024 to make your contribution for 2023. The specific date of the tax filing deadline can vary each year, so it’s important to check the exact deadline for 2024.
Once you start funding your Roth IRA, it’s time to decide how you want to invest that money, just as you would with any other investment. The type of risk and diversity you select should be based on your own risk tolerance, as well as your age. If you’re in your 20s, you can pick much more aggressive investments than if you’re in your 50s.
For a low-cost approach, experts recommend either index funds or ETFs, which allow you to buy stocks and bonds that track broader markets.
Bottom Line
A Roth IRA can be an effective part of your retirement strategy, particularly considering all the tax advantages that come along with it. For the most effective retirement savings plan, look at all the options available to you. Then, see how each piece fits in the puzzle. As you inch closer and closer to retirement, continually reevaluate how you invest your savings.
For example, if you’re expecting a raise or promotion in the upcoming years that will bump you out of the income range for contributing to a Roth IRA, it may be wise to max out your contributions while you can. If you get a job with an employer that matches your 401(K) contributions, make sure you’re taking full advantage of that perk.
Constant reevaluation is necessary to make sure you’re benefitting from your retirement tools as much as possible. And you want to make sure that you’re taking care of your finances now and in the future. A Roth IRA truly is a favorite because regardless of where you are in life today, you can provide yourself with a lot of room to maneuver around whatever comes in life.
Southern California’s luxury real estate market never sleeps. But this past year, it collectively caught its breath.
Luxury sales slowed down in 2023 — a combination of soaring interest rates, a newly introduced “mansion tax” and an inevitable drop-off from a pandemic market when megamansions flipped like hotcakes.
In 2022, there were 17 home sales above $50 million and 48 over $30 million in L.A. County, according to the Multiple Listing Service. In 2023, there were only five sales over $50 million and 23 over $30 million.
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But even in a down year, there were still plenty of headlines. Jay-Z and Beyoncé set the all-time price record in the state of California, while other celebrities sold homes and left L.A. just in time to avoid paying taxes under Measure ULA.
Here are the top sales of the year.
$200 million
History was made in May when Jay-Z and Beyoncé shattered California’s price record, paying $200 million for a concrete compound in Malibu.
The L-shaped house, which topped the previous record of $177 million, looks more like an airplane hangar or supervillain’s lair than a home. It was built by Tadao Ando, a decorated Japanese architect who also designed a home for Kanye West a few miles down the coast. Ando brought in 7,645 cubic yards of concrete to erect the 40,000-square-foot home.
It never officially hit the market, so photos are scarce. The property is perched above Malibu’s Paradise Cove and features concrete hallways and walls of glass that open to a swimming pool and lawn overlooking the ocean.
$60.85 million
Another power couple — Jennifer Lopez and Ben Affleck — claimed the second-highest home purchase of the year when they shelled out $60.85 million for a five-acre spread in Beverly Crest. High interest rates weren’t a problem; they didn’t need a 30-year-fixed. The pair paid in cash.
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The deal marked the end of a year-long house hunt for Lopez and Affleck, and the house boasts an array of amenities that few other mega-mansions can match. Across 38,000 square feet are 12 bedrooms, 24 bathrooms, 15 fireplaces, a movie theater, wine cellar, nail salon and sauna, as well as a 5,000-square-foot sports facility with a boxing ring and pickleball court.
The $60.85-million sale actually came at a discount; the home originally hit the market with a gargantuan price tag of $135 million.
$55 million
Some scratched their heads when Mark Wahlberg unloaded his Beverly Park mega-mansion for $55 million in February. The movie star spent years designing the French-inspired palace, and he originally asked $87.5 million when he first listed it in 2022.
But Wahlberg was a motivated seller. He moved to Nevada last year, and by selling the home in February, he avoided Measure ULA, a transfer tax that took effect April 1 and would’ve charged a 5.5% tax on the sale. At $55 million, Wahlberg’s tax bill would’ve been more than $3 million.
The European-inspired showplace is truly one of a kind, featuring amenities such as a five-hole golf course, driving range, grotto-style swimming pool and skate park. Wahlberg, a native of Massachusetts, also added a Boston Celtics-themed basketball court during his stay.
$52.056 million
Malibu’s second entry on this list comes via attorney Stuart Liner and his wife, Stephanie Hershey Liner, who sold their beach house on Point Dume for just over $52 million.
The Liners have made a fortune flipping houses over the years, including doubling their money on a house they bought from actor Danny DeVito. They scored a hefty profit here as well; records show they paid $21.758 million for the oceanfront home in 2020 before extensively remodeling the place.
The 6,000-square-foot house comes with a swimming pool and tennis court. It sold to Tom van Loben Sels, a partner at Bay Area tax firm Apercen Partners.
$52 million
For years, Villa Firenze was a cautionary tale, an extravagant reminder that while fortunes can be won in Southern California’s lucrative real estate market, you have to be strategic in how you sell to truly cash in.
Hungarian billionaire Steven Udvar-Hazy was not. The airplane mogul built the Italian-inspired mansion in 1998 and listed it for $165 million in 2017, which at the time was one of the most ambitious asking prices in California history.
Clearly overpriced, the house sat on the market for years until it was auctioned off for $51 million in 2021 to biotech entrepreneur Roy Eddleman, who, for some reason, tried the same thing as Udvar-Hazy.
Eddleman quickly attempted to flip the house for a massive profit, putting it back onto the market for $120 million just a year after he bought it. Unsurprisingly, there were no takers, and he died before it sold.
His estate slashed the price on the luxurious villa, which features 40-foot palm trees, 20-foot ceilings and a two-story library complete with a secret passageway that leads to a bedroom and bar.
After a year of price cuts, it finally sold in February for $52 million, just $1 million more than Eddleman paid for it at auction two years prior.
With the winter break now finally behind us, it’s time to talk mortgage rates again.
Lately, they’ve been on the minds of anyone even remotely interested in buying a home.
Or selling a home for that matter, as that can affect home buyer demand as well.
The good news is most forecasts are calling for lower mortgage rates throughout 2024.
And now there’s another piece of favorable data from Fannie Mae regarding mortgage rates and consumer sentiment.
Survey-High 31% of Consumers Expect Mortgage Rates to Fall This Year
A report released by Fannie Mae this morning revealed that consumers are growing increasingly bullish on mortgage rates in 2024.
Their Home Purchase Sentiment Index (HPSI), which reflects both existing views and future expectations for the housing market, asks respondents which way mortgage rates will go.
In the latest survey, a record 31% said they believe mortgage rates will fall over the next 12 months.
While 31% may not sound like a lot, consider this share was around 16% in October, and just 4% in December 2021!
In other words, sentiment has shifted big time, with mortgage rate expectations doing a virtual 180.
Simply put, consumers no longer expect mortgage rates to rise, but rather see them drifting lower after peaking last fall.
This is important for the housing market, which suffered mightily in 2023 as transactions plummeted in the face of 8% mortgage rates.
But with the expectation that the worst is now behind us and a return to rates in the 5% range (or even 4% range) is possible, it could reinvigorate home sales.
Aside from boosting affordability, simply due to a lower monthly housing payment, it could get some prospective buyers off the fence if they believe better times lie ahead.
Granted, not everyone is convinced.
Nearly a Third Still Think Mortgage Rates Will Move Higher This Year
Despite consumer optimism on mortgage rates hitting a new survey-high, 31% of respondents remain unconvinced.
Yes, the same percentage that think they’ll go down also think they’ll go up.
So it’s a bit of a standoff at the moment, though this pessimistic group has shrunk considerably.
In the prior survey, 44% of respondents expected mortgage rates to increase. And this share hovered around 50% for much of 2023.
It appeared to peak at 60% in mid-2022 and has since steadily fallen. Again, this could signal that the worst is behind us regarding high mortgage rates.
But it doesn’t mean they’ll drop back to their record lows, or anywhere near it.
The remaining 36% of respondents believe rates will simply stay put where they are over the next 12 months.
At last glance, this means a 30-year fixed mortgage rate somewhere between 6.5% to 6.75%.
While it’s not necessarily a low rate, it’s not as bad as it once was. And that alone could be somewhat of a game changer.
Look for Mortgage Rates to Experience Volatility in 2024
As noted in my 2024 mortgage rate predictions post, I believe interest rates will experience a bumpy ride as the year plays out.
However, I do expect rates to trend significantly lower and end the year just below 6%.
These ups and downs aren’t unique to 2024, but things could be even more volatile than usual given the contentious presidential election on the horizon.
And an economy that continues to surprise us, making the Fed’s inflation flight a little more complicated than it appears.
While the Fed is still expected to cut its federal funds rate several times this year, which should lead to lower consumer mortgage rates, it likely won’t be linear.
There will be good months and bad months, and times when rates rise more than they fall. It will mostly depend on the data, whether it’s CPI or the jobs report.
And as always, curveballs like geopolitical events, or simply politics in general, could also play a major role.
2024 Home Price Expectations Worsening Despite Lower Interest Rates
Lastly, despite a big improvement in mortgage rate sentiment, home price expectations took a turn for the worse.
While it’s logical to believe that mortgage rates and home prices have an inverse relationship, the data doesn’t support it.
Home prices and mortgage rates can fall together, go up together (as they did in 2022 and 2023), or go in opposite directions.
But there’s no clear correlation and just because rates are expected to fall in 2024 doesn’t mean home prices will surge again.
In fact, more of the same consumers surveyed by Fannie Mae expect home prices to go down over the next 12 months.
Just 39% of consumers expect home prices to go up in 2024, while 24% expect prices to go down, and 36% expect them to stay the same.
This means the net share of consumers who believe home prices will go up fell two percentage points to 15%.
So there’s still a lot of uncertainty, despite some recent positive developments. But perhaps if mortgage rates continue to drift lower, sentiment will improve.
Of course, if rates fall due to a recession or similar economic strife, fewer will believe it’s a good time to buy a home.
Speaking of, a whopping 83% believe it’s a bad time to buy a home while only 17% believe it’s a good time to do so.
Investing in real estate is some of the oldest and most reliable financial advice in the books. Few other assets can compete with real estate’s vast array of benefits. These benefits include tax advantages, appreciation, relative impunity to market shifts, and even the potential for passive income.
But even if you have every intention of investing in real estate, it can be challenging to get started. After all, even a modest home usually requires a substantial down payment. And it can take years to save up those five-figure sums. The term “real estate investor” may bring to mind a multi-millionaire who manages several properties, leaving you feeling overwhelmed enough to give up the ghost entirely.
Fortunately, it is possible to invest in real estate with little or no money, even if you aren’t swimming in discretionary income. For instance, with an Opportunity Fund or REIT (Real Estate Investment Trust) you can get your foot in the door even if you can’t afford to purchase an entire property. There are also a host of ways to leverage your own home. These include house hacking, renting vacation space on Airbnb, and more.
In this post, we’ll break down everything you need to know about how to invest in real estate. We’ll go over some of the most common types of real estate investing. We’ll also break down how they can help you make money. And we’ll explain how you can begin, no matter how much capital you have in hand.
Why Invest in Real Estate?
Before we dig into the meat of the post, let’s take a moment to backtrack. Why is real estate investing such a well-worn piece of financial advice?
You’ve probably heard that diversifying your portfolio of real estate investments is essential. But your “portfolio” doesn’t just have to live on the stock market! Real estate investing gives you, as the name suggests, a real, tangible asset. And it’s much less vulnerable to the capriciousness of the market.
Real estate investing can help you not only build home equity but also generate passive cash flow. Both through the process of appreciation and the more intentional, hands-on approaches we’ll study further below. And owning your own home can help you reap financial benefits while simultaneously providing for one of your most basic needs.
How to Invest in Real Estate with Little Money
When a down payment might cost as much as $60,000, it’s understandable that many first-time property shoppers feel overwhelmed. They say you have to spend money to make money. Yes, but that’s quite a hefty figure for the average American earner.
To be sure, some real estate investment strategies require a good deal of cash upfront to be workable. But there are other tactics that don’t necessitate such a large lump sum to begin with. This means you don’t have to be a real estate mogul to be a property owner. We’ll break down various strategies at both ends of the spectrum below.
Types of Real Estate Investing
Let’s get into the nitty-gritty. What types of real estate can you invest in?
There are three main types of investment properties available to real estate investors.
Residential properties are probably the ones you’re most familiar with. They are exactly what they sound like: buildings used by individuals and families as residential living spaces. These properties include single-family homes, duplexes, apartments, condominiums, and townhouses, and multi-family homes (so long as they’re being used residentially and don’t exceed four units).
Commercial real estate are properties used to conduct business. They may include offices, storefronts, retail spaces, farmland, and large multi-family houses or apartment buildings.
Industrial real estate are properties that serve industrial business purposes, such as factories, power plants, or storage and shipping warehouses.
Furthermore, there are both active and passive forms of real estate investing.
Active investing is, well, active. It requires a good deal of time, energy, and commitment from the investor. Active investing may become a part- or even full-time job for the investor. They usually share ownership with few (or no) other people and thus bears a lot of responsibility for the success of the investment.
Passive investing, on the other hand, allows the investor to reap the benefits of investing without taking on the pressure and responsibility of full ownership of a tangible property. In most cases, passive investing involves supplying capital to a larger investment pool. You earn capital gains on loan interest through dividends paid to shareholders.
We’ll go into it all of this in more detail, including specific ways you can invest in real estate, both active and passive.
How Real Estate Investing Can Help You Earn
Before we break down the specific ways you can get started investing in real estate, let’s talk about how it can help you make money. (After all, that’s the whole point!)
You can invest in real estate in several ways, depending on what type of investing you’re participating in.
Equity and appreciation
Purchasing real estate equips the owner with a “hard asset”; the tangible property or building. Owning this kind of asset confers equity, or value. It isn’t as vulnerable to the fluctuations of the market as stocks, bonds, and other securities. Furthermore, property has a longstanding history of increasing in value over time, or appreciating.
On the contrary, other types of purchases (like automobiles) depreciate, or lose value. Thus, purchasing a property may allow you to earn income passively simply through the process of appreciation. It more or less ensures that the cash value of your home is a safe and stable part of your overall net worth.
Rental income
Chances are, you’ve had to pay rent to a landlord at some point in your life. Well, if you become the landlord, someone’s paying you the rent. And as long as that rental price eclipses your total expenses, including your mortgage and maintenance costs, the rest is profit!
Aside from managing the investment property, you can also collect rental income by sharing your space on platforms like Airbnb or house hacking, which we’ll explain below.
Sale profit
This happens when you buy a home with the intention to fix it up and sell it down the line (also known as “house flipping”.) It’s the difference between your sale cost and your purchase cost (minus all the expenses put into maintenance and improvements) is pure profit.
Loan interest
The interest charged on home and property loans can increase the value of real estate investments made through REITs, investment platforms, and private equity firms.
Ways to Invest in Real Estate
Now we know a bit about the different types of properties available to investors and how those real estate investments stand to help you earn cash.
So, what are the specific ways to go about real estate investing? There are several in both the “active” and “passive” categories.
Active:
House flipping, or rehabbing, is when an investor purchases a property with the sole intent of fixing it up to sell it later on.
Wholesaling is similar to flipping houses, but less work intensive. Wholesaling occurs when an investor purchases a property they believe is underpriced, so they can quickly sell it to another investor at a profit.
Rental properties give investors a long-term way to draw profit from their investments, though they do require lots of hands-on management and maintenance over time.
Airbnb, Vrbo, and other vacation rentals can often be listed for substantial per-night prices. They can be especially lucrative in high-demand travel destinations.
Passive:
Private equity funds pool the assets of many investors, which creates a larger, more powerful investment fund. These funds are usually overseen and allocated by a dedicated manager. They may have high minimum investment thresholds and requirements to join.
Opportunity funds also pool investors’ assets, but with the specific purpose of making investments in qualified Opportunity Zones. These are low-income, up-and-coming communities that would benefit from private investments and economic development.
REITs are companies that invest in commercial properties. Private investors can purchase shares of the company and earn income on capital gains in the form of dividends.
Online REIT platforms can make real estate investing accessible to beginning investors, often carrying no net worth or accreditation restrictions. They may allow you to invest in specific properties or in pre-built, diversified portfolios of real estate.
We’re going to break down these different investment options in even more detail below. But first, let’s start a bit closer to home—literally.
Starting with Your Own Home
One of the most straightforward ways to invest in real estate is probably already on your financial to-do list, anyway: purchasing your own home.
Purchasing a home of your own allows you to kill two birds with one stone. You’re taking care of the basic need of shelter, while also leveraging the purchase to reap a host of financial benefits.
Here are just a few ways that owning a home can help you save and earn money.
Build equity: As discussed above, property ownership confers relatively immutable equity to the purchaser—that is, your home is a fairly safe, tangible asset to add to your overall investment portfolio.
Receive tax benefits: Certain homeowners’ expenses, including real estate taxes and home mortgage interest, are tax-deductible. And if you sell your home, you may exclude up to $250,000 of capital gains (or $500,000 if filing jointly) from your taxes.
Take advantage of appreciation: Even accounting for the 2008 crisis, the cost of homes and other properties have steadily increased over time for the past 50 years. So, the home you purchase today will likely be worth more than the price you paid for it in the future.
Stop paying rent: Although you’ll likely still have a mortgage payment and other expenses to cover as a homeowner, you won’t be paying rent to live in another person’s property. It’s a cost that is essentially entirely wasted, since you aren’t building home equity in the rental property.
Keep the value of your home improvements: When you own a home of your own, any improvements you make will add to the property’s total value, beefing up your asset as well as beautifying your living space.
House Hacking
Another way to make money by purchasing your own home is known as “house hacking“. It’s a real estate investment strategy wherein you leverage rental income from your primary residence to live there cost-free.
The term was originally coined by entrepreneur and author Brandon Turner, who wrote “The Book on Investing in Real Estate with No (and Low) Money Down” and “The Book on Rental Property Investing.”
House hacking may be done, for example, by purchasing a duplex. The investor rents out one unit at a price that covers the mortgage cost while living in the second unit. Some homeowners have also used space-share platforms like Airbnb to offset their housing costs in the same manner.
Real estate investors can use this strategy to pay off the property and even create a profit margin. This will eventually allow them to invest in more rental properties. Thus, house hacking is a great way to combine the personal financial benefits of homeownership with the long-term earning potential of other types of property investment.
Buying a Home Without a Huge Down Payment
Given the recent trends in the housing market, you may feel daunted by the prospect of becoming a homeowner. In 2023, the U.S. housing market experienced significant challenges, with home prices rising to near-record highs.
But there are many incentives and programs designed to make this large investment more feasible for first-time home buyers.
FHA (Federal Housing Administration) Loans may allow borrowers to purchase a home with a down payment as small as 3.5% of the purchase price and with credit scores as low as 580. (You may also be approved for an FHA loan with a lower credit score, but your minimum down payment may be higher.)
The USDA also offers low-cost loans to low- and moderate-income households purchasing homes in qualified rural areas.
Down Payment Assistance Programs offered by local governments and private firms can provide grants, loans, and educational materials to prospective home buyers
Many other financial institutions and organizations also have special incentives for those purchasing their first homes or low-income families in the housing market. Make sure you check with your local housing authority to learn more about what’s available in your area.
Active Investment Opportunities
Want to get hands-on? Here are the details on some of the most popular and accessible active real estate investment opportunities.
House Flipping
If you’ve ever watched more than thirty minutes of HGTV, chances are you’re at least passingly familiar with the idea of flipping houses. It’s basically where you purchase a home with the express intent of fixing it up and selling it (at a higher cost) later.
House flipping is a great way for investors to earn a significant profit. However, they do need to know how to complete the flip successfully without incurring too many costs. Expenses can quickly eat into the investment’s return.
Finding a Home to Flip
House flippers have to be able to recognize a home that may be slightly undervalued but would be able to sell well given the proper upgrades. This involves both an understanding of the area’s desirability and the types of improvements that generate increased home value.
House flippers are responsible for the entire cost of the home purchase. They must also pay for all the upgrades, which they may either do themselves or hire out to professionals.
Either way, flipping houses incurs a hefty up-front cost, and it does come at a risk. Even after you make all the improvements, it’s possible that the house will languish on the market.
This can mean racking up maintenance, taxes, and other expenses for the real estate investor. However, a properly executed, short-term flip can create a substantial profit margin in a relatively small period of time.
Wholesaling
Like house flippers, wholesalers purchase homes with the intent of selling them quickly. But, they aren’t planning to do any heavy lifting along the way.
Instead, wholesalers find properties that are undervalued for their market. They scoop them up and resell them to other investors at a price closer to their true value. Thus, earning the difference as a profit.
Rental Properties
While managing rental properties may seem like a straightforward and reliable way to earn income, it’s one of the most work-intensive approaches on this list. It does require enough up-front capital to purchase the property (or properties) in the first place. However, landlords do stand to see substantial and steady returns in exchange for the work and effort they put into their properties.
After purchasing a viable property, which needs to be well-maintained, in a desirable location, and well-advertised, landlords are responsible for filling that property with qualified tenants. This can involve a time-consuming and labor-intensive screening process.
After all, as a landlord, you’re giving your renters the keys to your investment—literally! It can be a very risky move if you don’t take the time to ensure your tenants are well-qualified.
Finding & Qualifying Tenants
Along with running a standard background check, landlords may also conduct interviews with and request credit reports from prospective renters, all of which takes time. And don’t forget: every month your rental property is unfilled is a waste of potential income.
Once you do find qualified tenants, you’ll be responsible for a host of obligations unless you hire a property management company. You’ll need to provide maintenance and repairs. You’ll also need to stay on top of rent collection and record-keeping. It can quickly become unwieldy once you have several properties.
You’ll also need to be sure you’re in compliance with all the renters’ rights that exist in your jurisdiction, including laws that regulate the eviction process. Of course, you’ll need to put in the work to find good renters and a well-maintained property in the first place. When done so, managing rentals can provide a smooth and steady source of income for relatively little active work.
Seller Financing
Want to buy an investment property with no money down? Look into seller financing or a land contract. This is where the seller acts as the bank. You make your mortgage payments, including interest, to the seller.
After a few years or so, you will have enough equity in the home to get a bank loan. You can then make a lump sum payment to the seller.
Private & Hard Money Lenders
Private money lenders generally charge between 6% to 12% on the money borrowed. Hard money lenders usually charge 10% to 18%. Hard money loans are not from banks. They are from individuals or businesses aimed at financing real estate investments for a return on their money.
Hard money loans are used by investors who don’t qualify for conventional financing. They are typically used to fund renovations. Once the house is finished or has some equity in it, the borrower then refinances to a conventional mortgage with a lower interest rate.
Airbnb, Vacation Rentals, and Space Sharing
Managing a traditional property, wherein renters sign a multi-month lease, is not the only way to make money from an investment property. Platforms like Airbnb have revolutionized the real estate market. They allow homeowners (and sometimes even renters) to make money by renting out their space on a temporary, per-night basis as a vacation rental.
What’s more, you don’t necessarily have to rent out an entire home or unit to participate. A private room, or even a couch in a shared living room, is acceptable for some travelers using these services.
Airbnb and other vacation rental platforms make it simple for a novice renter. You don’t need to have a huge amount of know-how to start earning money this way. In fact, you don’t even necessarily have to “invest” in any property at all. Some landlords may allow their renters to list their housing on Airbnb as a sublet.
Airbnb Laws
However, as this new form of investment property has expanded, it’s created housing crunches in some cities. It’s resulting in “Airbnb laws,” or short-term rental legislation. These laws may limit your ability to use your housing in this way.
Always check your local regulations before you list your space on Airbnb or another of these types of platforms. If you don’t own the space, ensure that short-term sublets are allowed. Check your lease or ask your landlord directly.
Real Estate Investing Groups and Passive Investing
You may have noticed that many of the active real estate investment opportunities listed above do require substantial upfront capital to get started. You can’t wholesale or flip a house if you can’t purchase the house in the first place!
Furthermore, these active strategies generally involve a high level of skill, effort, and responsibility. It may not be feasible for those committed to other full-time careers.
Fortunately, there are still other ways to get involved with real estate investing, even if you don’t want to own or manage tangible property. (Or if doing so is out of financial reach for you right now). These passive investment tactics can help you glean the benefits of real estate investing without taking on quite as much of a fiscal and physical burden.
Private Equity Funds
A private equity, or PE fund, pools contributions from various investors to make larger investments. They’re often limited liability partnerships. That means there are fixed periods during which investors do not have access to their holdings.
Instead, PE funds allow investors to earn gains on debt and equity assets passively, without putting in much active work or research. Asset allocation and investments are managed by a dedicated individual or group. They earn money through annual fees as well as profit sharing.
PE funds come in various types, including the following:
Core equity funds generally invest in established commercial properties. They don’t carry risks like needing major improvements or experiencing losses for lack of consumer demand. The core strategy is simultaneously the least risky among PE funds and, typically, the least gainful.
Core plus equity funds generally follow the core strategy, but take a few more risks on properties that may require minor upgrades. This leads to a higher risk-return ratio on average.
Value added equity funds may invest in commercial properties that require substantial upgrades or new management to operate at their full potential. They may also seek to sell the property after improvements are made to create an additional profit margin.
Opportunistic equity funds offer the highest potential rewards, along with the highest risk. Investment properties purchased via these funds may need new construction or even land acquisitions. The payoff of such a new business venture is all but guaranteed. Furthermore, these developments take time, which means your investment capital may be tied up for longer. However, when they pay off, opportunistic equity funds see some of the best returns of the bunch.
Although PE funds are powerful real estate investment engines, they do often have high minimum investment requirements, generally not less than $100,000. Some funds may also be limited to accredited or institutional investors who can demonstrate available means.
Opportunity Funds
Opportunity funds operate on a similar model to private equity funds but are specifically used to make investments in qualified Opportunity Zones. These are economically distressed areas designated by the state and certified by the Secretary of the U.S. Treasury. Opportunity funds are legally required to invest 90% of their assets into properties in these Opportunity Zones.
Because these areas tend to be up-and-coming (and because tax benefits can incentivize investors to support them), opportunity funds often see substantial capital gains for their investors. And taxes incurred on those gains can be deferred until December 26, 2026.
That means the longer the investment is held before that date, the lower your overall tax liability will be. And opportunity fund investments held for at least ten years prior can expect their capital returns to be permanently excluded from capital gains taxes.
Of course, this strategy requires parting with your investment capital for a significant period of time. It’s best for those who can afford to put down the money to play the long game. If you can, however, investing in one is a great way to see substantial returns for almost zero effort.
Real Estate Investment Trusts (REITs)
A real estate investment trust(REIT) is a company that invests in commercial properties. As an investor, you purchase shares of this company just as you would any other. You earn income through its debt and equity assets in the form of shareholder dividends.
REITs operate similarly to mutual funds. They provide an excellent way for the average earner to experience the benefits of real estate investing. You don’t have to have a huge amount of capital to get started, as minimum investment requirements may be quite low.
However, they may carry high investment fees, especially in the case of private REITs (i.e., those not publicly traded on the stock market). Fees at these companies may run as high as 15%. REITs may also be illiquid and keep your money locked up for longer periods of time.
Online Real Estate Investment Platforms
In this digital, all-sharing-all-the-time age, most of us have already heard of crowdfunding. Real estate investments are no exception to the rules of the new millennium.
Online real estate investment platforms have begun springing up. They can make real estate gains achievable for average investors who may not have the towering net worth or accreditation status necessary to buy into more formal funds. Depending on the specific company, you might be able to choose specific investment properties to fund or buy into a diversified portfolio of investments.
Fees and minimum investment requirements are relatively low on real estate crowdfunding platforms. For instance, Fundrise lets you get started with just $500. That is much less than you’d have to pay to get in on most types of active investments! Check out our full review of Fundrise here.
Ready to Get Started Investing in Real Estate?
As you can see, there are several ways to start investing without saving up a five- or six-figure sum. And if you do it right, your investments can actually help you reach those high savings goals. You can then fund other types of investment projects!
However, as with any financial objective, planning and strategizing is key. Saving up as much capital as possible will help you get the best return on your investment once you’re ready.
You can’t allocate your assets without first keeping track of them, and to achieve that, you need to create a budget. If you’re in debt, aggressively paying it off will free you of a weighty financial anchor, so check out these powerful debt relief options.
Finally, if you intend to purchase property either to live in or as an investment opportunity, your credit score matters. It’s as simple as that. If your credit score isn’t quite where you want it to be, take these steps to raise it. Doing so will allow you to get the best interest rate once you’re ready to make the big purchase.
FHA loans have been making homeownership more accessible for decades. Tailored to borrowers with lower credit, the FHA makes it possible to buy a house with a credit score of just 580 and only 3.5% down.
But home buyers aren’t the only ones who can benefit. For current homeowners, an FHA refinance may let you access low rates and home equity, even without great credit.
Not sure whether you’ll qualify for a mortgage? Check out the FHA program. You might be surprised.
Verify your FHA loan eligibility. Start here
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>Related: How to buy a house with $0 down: First-time home buyer
What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA).
FHA insurance protects mortgage lenders, allowing them to offer loans with low interest rates, easier credit requirements, and low down payments (starting at just 3.5%).
Thanks to their flexibility and low rates, FHA loans are especially popular with first-time home buyers, home shoppers with low or moderate incomes, and/or lower-credit home buyers.
But FHA financing isn’t limited to a certain type of buyer — anyone can apply.
Verify your FHA loan eligibility. Start here
How does an FHA loan work?
The first thing to know about FHA mortgages is that the Federal Housing Administration doesn’t actually lend you the money. You get an FHA mortgage loan from an FHA-approved bank or lender, just like you would any other type of home mortgage loan.
The FHA’s role is to insure these mortgages, offering lenders protection in case borrowers can’t pay their loans back. In turn, this lets mortgage lenders offer FHA loans with lower interest rates and looser standards for qualifying.
The one catch — if you want to call it that — is that you pay for the FHA insurance that protects your mortgage lender. This is called “mortgage insurance premium” or MIP for the life of the loan or until the FHA home loan is refinanced into another type of mortgage. We go over this in detail below.
Types of FHA loans
FHA loans offer various options to meet different home buying needs. These government-backed loans are designed to make homeownership more accessible, especially for those with less-than-perfect credit scores or limited savings.
Each type of FHA loan is tailored to different financial situations and home buying needs. Here’s what you can expect.
Compare FHA loan quotes from multiple lenders. Start here
FHA mortgage loan
An FHA mortgage is ideal for first-time home buyers, requiring a minimum credit score of 580 for a 3.5% down payment. Those with credit scores between 500 and 579 can still qualify for a 10% down payment. These loans are popular due to their lenient credit score requirements and low-down payment options.
FHA rate-and-term refinance
An FHA refinance loan is suited for borrowers looking to improve their loan terms or lower interest rates, especially if their credit scores have improved since obtaining their original mortgage. It offers a way to adjust loan terms to better fit current financial situations.
FHA Streamline Refinance
For current FHA loan holders, the FHA Streamline Refinance provides an efficient way to refinance with minimal documentation and underwriting. It often results in lower interest rates and can potentially reduce mortgage insurance premiums. This option is advantageous for those who want to refinance without a complicated process.
FHA cash-out refinance
An FHA cash-out refinance allows homeowners to tap into their home equity, converting it into cash. It requires a minimum credit score of 620, and borrowers must leave at least 15% equity in their home after the refinance. It’s suitable for those needing extra funds for expenses or investments.
FHA Home Equity Conversion Mortgage (HECM)
HECM is a reverse mortgage for homeowners aged 62 and older, allowing the conversion of home equity into cash. It provides financial flexibility for seniors by enabling access to their home equity without selling the home.
FHA 203(k) loan
The FHA 203(k) loan is designed for home purchases requiring renovations. It combines the cost of the home and renovation expenses into one loan. Borrowers must meet specific credit score requirements and ensure that renovations are completed within six months.
FHA Energy Efficient Mortgage
This loan type allows borrowers to include energy-efficient upgrades in their FHA loan. It’s aimed at reducing utility costs and increasing the home’s environmental friendliness, thereby potentially increasing its value.
Section 245(a) loan
The Section 245(a) program is for borrowers expecting an increase in their income. It offers a graduated payment schedule that starts low and increases over time, aligning with anticipated income growth. This loan is particularly beneficial for young professionals expecting career advancement.
Check your FHA loan eligibility. Start here
FHA loan requirements
Homeownership can be a liberating experience, especially for first-time buyers. With their flexible guidelines and government backing, FHA home loans provide a welcoming path.
Understanding FHA loan requirements can make the process much easier, opening the door to a future in your ideal home.
Check your FHA loan eligibility. Start here
To be eligible for an FHA loan, applicants must adhere to specific guidelines:
The property must undergo a home appraisal by an FHA-approved appraiser.
The property must serve as the applicant’s primary residence; investment properties and second homes are not eligible.
Occupancy of the property is required within two months following the closing.
A mandatory inspection is conducted to ensure the property meets FHA’s basic standards.
There are a few more specific conditions to qualify, such as a down payment amount, mortgage insurance, credit score, loan limits, and income requirements.
FHA loan down payment requirements
FHA loans require a minimum down payment, which varies based on credit score. For credit scores of 580 and above, a minimum down payment of 3.5% is required. Borrowers with credit scores between 500 and 579 must make a 10% down payment.
FHA mortgage insurance premiums
FHA mortgage insurance premium (MIP) is what makes the FHA program possible. Without the MIP, FHA-approved lenders would have little reason to make FHA-insured loans.
There are two kinds of MIP required for an FHA loan. One is paid as a lump sum when you close the loan, and the other is an annual premium, which becomes less expensive each year as you pay off the loan balance:
Upfront Mortgage Insurance Premium (UFMIP) = 1.75% of the loan amount for current FHA loans and refinances
Annual Mortgage Insurance Premium (MIP) = 0.85% of the loan amount for most FHA loans and refinances
MIP is split into monthly payments that are included in your mortgage payment. You’ll have to pay FHA insurance for the life of the loan or if you refinance into another type of mortgage loan.
The good news is that, as a homeowner or home buyer, your FHA loan’s MIP rates have dropped. Today’s FHA MIP costs are now as much as 50 basis points (0.50%) lower per year than they were in previous years.
Also, you have ways to reduce what you’ll owe in FHA MIP.
Depending on your down payment and loan term, you can reduce the length of your mortgage insurance to 11 years instead of the entire loan.
Loan term
Original down payment
MIP duration
20, 25, 30 years
Less than 10%
Life of loan
20, 25, 30 years
More than 10%
11 years
15 years or less
Less than 10%
Life of loan
15 years or less
More than 10%
11 years
Or, you could refinance out of FHA MIP at a later date.
With FHA interest rates as competitive as they are today, refinancing could reduce your monthly mortgage payments and cancel your mortgage insurance premium if you have enough equity in the home.
Check your FHA loan rates. Start here
FHA loan credit score minimums
The minimum credit score requirement for an FHA loan is 500. However, a score of 580 or higher allows for a lower down payment. Credit scores directly impact loan terms and down payment amounts.
Debt-to-income ratio
FHA loans consider the borrower’s debt-to-income (DTI) ratio, a measure of monthly debt payments against monthly income. The FHA prefers a DTI ratio of no more than 43%, though exceptions can be made for higher ratios with compensating factors.
Income and employment requirements
There is no specific income threshold for FHA loans, but borrowers must demonstrate steady employment history. Verification includes pay stubs, W-2s, tax returns, and bank statements.
FHA loan limits
Loan limits for FHA loans vary by county. However, starting January 1, 2024, the new FHA loan limit will be $498,257 for a single-family home in most parts of the country. Limits increase for 2-, 3-, and 4-unit properties.
FHA loan rates
Interest rates for FHA loans are competitive and can vary based on factors such as prevailing market rates, borrower’s credit score, income, loan amount, down payment, and DTI ratio. Government backing often enables lenders to offer lower rates compared to conventional mortgages.
Compare your FHA loan rates from multiple lenders. Start here
Today’s rates for a 30-year, fixed-rate FHA loan start at % (% APR), according to The Mortgage Reports’ daily rate survey.
Thanks to their government backing, FHA loan rates are competitive even for lower-credit borrowers. But interest rates can vary a lot from one lender to the next, so be sure to shop around for your best offer.
FHA loan benefits
Check your FHA loan eligibility. Start here
1. Lower down payment: Just 3.5 %
For today’s home buyers, there are only a few mortgage options that allow for down payments of 5% or less. The FHA loan is one of them.
With an FHA mortgage, you can make a down payment as small as 3.5% of the home’s purchase price. This helps home buyers who don’t have a lot of money saved up for a down payment along with home buyers who would rather save money for moving costs, emergency funds, or other needs.
2. FHA allows 100% gift funds for the down payment and closing costs
The FHA is generous with respect to using gifts for a down payment. Very few loan programs will allow your entire down payment for a home to come from a gift. The FHA will.
Via the FHA, your entire 3.5% down payment can be a gift from parents or another family member, an employer, an approved charitable group, or a government homebuyer program.
If you’re using a down payment gift, though, you’ll need to follow the process for gifting and receiving funds.
3. FHA loans allow higher debt-to-income ratios
FHA loans also allow higher debt-to-income ratios.
Your debt-to-income ratio, or DTI, is calculated by comparing two things: your debt payments and your before-tax income.
For instance, if you earn $5,000 a month and your debt payment total is $2,000, your DTI is 40%.
Officially, FHA maximum DTIs are as follows.
31% of gross income for housing costs
43% of gross income for housing costs plus other monthly obligations like credit cards, student loans, auto loans, etc.
However, a 43% DTI is actually on the low end for most FHA borrowers. And FHA will allow DTI ratios as high as 50%. Although to get approved at such a high ratio, you’ll likely need one or more compensating factors — for instance, a great credit score, significant cash savings, or a down payment exceeding the minimum.
In any case, FHA is more lenient in this area than other mortgage loan options.
Most conventional mortgage programs — those offered by Fannie Mae and Freddie Mac — only allow debt-to-income ratios between 36% and 43%.
With down payments of less than 25%, for example, Fannie Mae lets you go to 43% DTI for FICOs of 700 or higher. But most people don’t get conventional loans with debt ratios that high.
4. FHA loans accept lower credit scores
Officially, the minimum credit scores required for FHA mortgage loans are:
580 or higher with a 3.5% down payment
500-579 with a 10% down payment
High credit scores are great if you have them. But past credit history mistakes take a while to repair.
FHA loans can help you get into a home without waiting a year or more for your good credit to reach the “excellent” level. Other loan programs are not so forgiving when it comes to your credit rating.
Fannie Mae and Freddie Mac (the agencies that set rules for conventional loans) say they accept FICOs as low as 620. But in reality, some lenders impose higher minimum credit scores.
5. FHA even permits applicants with no credit scores
What if an applicant has never had a credit account? Their credit report is, essentially, blank.
FHA borrowers with no credit scores may also qualify for a mortgage. In fact, the U.S. Department of Housing and Urban Development (HUD) prohibits FHA lenders from denying an application based solely on a borrower’s lack of credit history.
The FHA allows borrowers to build non-traditional credit as an alternative to a standard credit history. This can be a huge advantage to someone who’s never had credit scores due to a lack of borrowing or credit card usage in the past.
Borrowers can use payment histories on items such as utility bills, cell phone bills, car insurance bills, and apartment rent to build non-traditional credit.
“Not all lenders who are FHA approved offer these types of loans, so check with your loan officer individually,” cautions Meyer.
6. FHA loans can be up to $ in most of the U.S.
Most mortgage programs limit their loan sizes, and many of these limits are tied to local housing prices.
FHA mortgage limits are set by county or MSA (Metropolitan Statistical Area), and range from $ to $ for single-family homes in most parts of the country.
Limits are higher in Alaska, Hawaii, the U.S. Virgin Islands, and Guam, and also for duplexes, triplexes, and four-plexes.
7. FHA also allows extended loan sizes
As another FHA benefit, FHA loan limits can be extended where home prices are more expensive. This lets buyers finance their home using FHA even though home prices have skyrocketed in certain high-cost areas.
In Orange County, California, for example, or New York City, the FHA will insure up to $ for a mortgage on a single-family home.
For 2-unit, 3-unit and 4-unit homes, FHA loan limits are even higher — ranging up to $.
If your area’s FHA’s loan limits are too low for the property you’re buying, you’ll likely need a conventional or jumbo loan.
8. If you have an FHA loan, you can lower your rate with an FHA Streamline Refinance
Another advantage for FHA-backed homeowners is access to the FHA Streamline Refinance.
The FHA Streamline Refinance is an exclusive FHA program that offers homeowners one of the simplest, quickest, and most affordable paths to refinancing.
An FHA Streamline Refinance requires no credit score checks, no income verifications, and home appraisals are waived completely.
In addition, via the FHA Streamline Refinance, homeowners with a mortgage pre-dating June 2009 get access to reduced FHA mortgage insurance rates.
Verify your FHA loan eligibility. Start here
FHA loan disadvantages
What is the downside to an FHA loan? Among the numerous benefits of FHA loans, there are certain disadvantages that potential borrowers should be aware of. These drawbacks can impact the overall cost and flexibility of the loan.
Here are the downsides that you should know about FHA home loans.
FHA loan mortgage insurance premiums
One of the primary drawbacks of FHA loans is the mandatory mortgage insurance premiums. These include an upfront premium at closing, generally 1.75% of the loan amount, and ongoing monthly payments. This additional cost can make FHA loans more expensive over the long term
Loan limits
One notable limitation of FHA loans is the lower loan limits compared to conventional loans, which can be restrictive for higher-income buyers. The FHA mortgage limit for a one-unit property ranges from $ to $ for single-family homes in most parts of the country, which may not be sufficient in areas with higher property values.
Strict property requirements
FHA loans come with stringent property requirements. The purchased home must be the borrower’s primary residence and must meet specific safety and condition standards. This requirement can limit the types of properties that qualify for an FHA loan.
FHA loan alternatives
Alternative loans, like USDA and VA loans, offer distinct advantages, such as no down payment requirements, but come with specific eligibility criteria. Understanding these alternatives ensures you make a well-informed decision about the type of mortgage that’s right for you.
Conventional 97
The Conventional 97 program comes with a down payment requirement of just 3%. It stands out due to the absence of income limits and mandatory home buyer education, making it accessible to a broader range of homebuyers.
Check your conventional loan eligibility. Start here
HomeReady Mortgage by Fannie Mae
The HomeReady mortgage program is designed for low- to moderate-income families, allowing a home purchase with only a 3% down payment. Furthermore, this program permits the entire downpayment and closing costs to be covered by gifts or grants, offering significant financial flexibility.
Freddie Mac Home Possible
The Home Possible loan is notable for its reduced mortgage insurance costs compared to other similar programs. With a 3% down payment requirement and lower ongoing costs, Home Possible is an attractive alternative for those looking to save on mortgage insurance.
USDA loans
USDA loans, backed by the U.S. Department of Agriculture, are an attractive alternative, especially for moderate-income buyers in rural areas. They don’t require a down payment, which is a significant advantage. However, eligibility for USDA loans is restricted based on income and geographical limits, and not every property qualifies for this type of financing.
VA loans
VA loans are another viable alternative, particularly for U.S. military service members, veterans, and certain surviving spouses. Like USDA loans, VA loans also require no down payment. However, eligibility for VA loans is exclusive to the military community, limiting their accessibility to the general public.
FAQ: FHA loans
Can I choose between a fixed rate and an adjustable-rate FHA loan?
Yes, FHA loans offer both fixed-rate and adjustable-rate (ARM) options. A fixed-rate FHA loan provides a consistent interest rate and monthly payment for the life of the loan, ideal for those who prefer stability. An adjustable-rate FHA loan, on the other hand, has an interest rate that can change over time, typically offering lower initial rates.
Do FHA loans have lower interest rates?
FHA loans often have lower interest rates compared to many conventional loan options. This is largely due to the government backing of FHA loans, which reduces the risk for lenders. As a result, lenders are generally able to offer more competitive mortgage rates to borrowers. However, the actual interest rate you’ll receive on an FHA loan can vary based on several factors, including your credit score, loan amount, and the current market conditions. It’s always a good idea to compare rates from multiple lenders to ensure you’re getting the best deal possible for your situation.
Are FHA loans assumable?
Yes. A little-known FHA benefit is that the agency will allow a home buyer to assume the existing FHA mortgage on a home being purchased. The buyer must still qualify for the mortgage with its existing terms but, in a rising mortgage rate environment, it can be attractive to assume a home seller’s loan. Five years from now, for example, a buyer of an FHA-insured home could inherit a seller’s sub-3 percent mortgage rate. This can make it easier to sell the home in the future.
Can you buy a rental property with an FHA loan?
While you can’t buy a true rental property with an FHA loan, you can buy a multi-unit property — a duplex, triplex, or fourplex — live in one of the units, and rent out the others. The rent from the other units can partially, or even fully, offset your mortgage payment.
Are closing costs higher for FHA loans?
Closing costs are about the same for FHA and conventional loans with a couple of exceptions. First, the appraiser’s fee for an FHA loan tends to be about $50 higher. Also, if you choose to pay your upfront MIP in cash (instead of including this 1.75% fee in your loan amount), this one-time fee will be added to your closing costs. Additionally, the fee can be rolled into your loan amount.
What credit score do I need for an FHA loan?
Most borrowers will need a minimum credit score of 580 to get an FHA loan. However, home buyers who can put at least 10% down are eligible to qualify with a 500 score. Yet, each lender may have their own credit score minimums, separate to those established by the Federal Housing Administration.
What is the loan-to-value ratio requirement for FHA loans?
The loan-to-value (LTV) ratio for FHA loans typically cannot exceed 96.5%, meaning you can borrow up to 96.5% of your home’s value. This high LTV ratio is part of what makes FHA loans accessible, especially for first-time homebuyers who might not have substantial savings for a down payment.
How does PMI work with FHA loans?
For FHA loans, the equivalent of private mortgage insurance (PMI) is the mortgage insurance premium (MIP). MIP is required for all FHA loans, regardless of the down payment or loan-to-value ratio. This insurance protects lenders from losses in case of borrower defaults and is included in both upfront and ongoing mortgage costs.
What happens if I default on an FHA loan?
If you default on an FHA loan, the lender can initiate foreclosure proceedings. The FHA loan program, backed by the Federal Housing Administration, is designed to minimize the risk of defaults by offering more lenient qualification criteria. However, consistent failure to make mortgage payments may lead to foreclosure, impacting your credit score and homeownership status.
Today’s FHA loan rates
Now is an opportune time to consider an FHA loan, with current mortgage rates being historically competitive.
FHA loan interest rates are typically among the most competitive. To capitalize on these favorable rates, start by comparing offers from FHA-approved lenders.
Finding the most affordable loan could be just a few clicks away. Begin your journey towards homeownership today by exploring your options and discovering the best rates available for your financial situation.
Time to make a move? Let us find the right mortgage for you
While it is possible to take out a Federal Housing Authority (FHA) loan to purchase a second home, it’s only allowed in a handful of specific scenarios. Many first-time homebuyers choose an Federal Housing Authority (FHA) loan because of its lower credit score and down payment requirements, so when they need to purchase a second home the natural instinct is to look at financing with a second FHA loan. Read on for more details on how FHA loans work and the few exceptions that allow borrowers to qualify for more than one at a time.
What Is an FHA Loan?
An FHA loan is a type of mortgage that’s insured by the federal government and issued by a lender. FHA loans were created in 1934 at the height of the Great Depression to make homeownership more accessible. Since the FHA assumes the risk in case of default, lenders are able to offer more favorable loan terms to borrowers who might not otherwise qualify for conventional home mortgage loans.
With an FHA loan, borrowers with credit scores of 580 or more may qualify for a down payment of 3.5% of the home purchase price. (Borrowers with credit scores between 500 and 579 will be required to put 10% down.) These FHA loan requirements are helpful for first-time homebuyers who haven’t built up their credit or borrowers with less savings to put toward a down payment. FHA loans are one of several options for low-income home loans so consider all your options, whether you are thinking about taking out a first or second FHA loan.
Borrowers must also get mortgage insurance with an FHA loan. FHA mortgage insurance involves an upfront premium and an annual payment that’s added to monthly mortgage payments. The upfront premium is equivalent to 1.75% of the loan, while the annual payment is calculated based on the loan-to-value ratio and loan terms.
Besides the purchase of a home, FHA-insured loans are also available for home renovations and refinancing an existing FHA loan.
First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.
Recommended: How Do FHA 203k Loans Work?
How You Can Get an FHA Loan for a Second Home?
It’s possible to get an FHA loan more than once. For instance, if you’ve sold a prior home and haven’t owned a home for three or more years, you’d qualify as a first-time homebuyer and be eligible for an FHA loan. (And if you have a conventional mortgage on your first home, you may be able to get an FHA loan for a second home provided your credit score is adequate and your budget can handle the cost of a second mortgage; you would also have to occupy the second home as your primary residence.)
Meanwhile, qualifying for a second FHA loan is more complicated. For one, the purchased property must become the primary residence for at least one borrower. This includes a requirement to occupy the property within 60 days and have it be their primary residence for at least one year. These occupancy requirements mean that an FHA loan can’t be used to buy vacation homes or rental properties.
Here are details on the exceptions that permit borrowers to get an FHA loan on a second home:
• Relocation: If moving for employment-related reasons, borrowers who financed their current home with an FHA loan may qualify for a second FHA loan on a new home before or without selling their first property. However, to qualify, the job must be performed on-site and the new home must be located at least 100 miles away from the primary residence that was previously purchased with FHA-backed financing.
• Increase in Family Size: Borrowers may qualify for a second FHA loan to purchase a larger home to accommodate their growing family. This is evaluated on a case-by-case basis but typically requires proof of an increase in legal dependents and having at least 25% equity in the home.
• Vacating a Jointly Owned Property: Borrowers who are getting divorced or permanently vacating a home they inhabited with a co-borrower may qualify for a second FHA loan.
• Cosigning: A borrower who cosigned an FHA loan but didn’t live in the property could qualify for another FHA loan to buy their own home.
Recommended: FHA Loan Mortgage Calculator
FHA Second-Home Requirements
For borrowers who can satisfy one of the exceptions outlined above, the next step is meeting financial eligibility requirements for a second FHA loan. With any loan, and especially a second mortgage, lenders will consider the borrower’s ability to afford monthly payments when determining if they qualify. FHA loans can allow a debt-to-income (DTI) ratio of up to 50%, meaning that half of a borrower’s income is going to debt payments. Lenders, however, may look for a lower DTI of 43%, accounting for the cost of both mortgages, to approve a second FHA loan.
Borrowers will need to meet FHA loan credit score criteria to determine whether they’ll need to put 3.5% or 10% down. Besides the down payment, lenders also factor in savings for covering closing costs and monthly payments.
Pros and Cons of Multiple FHA Loans
There are advantages and drawbacks to having FHA loans for borrowers to keep in mind.
Pros
• A smaller down payment
• No income limits
• Lower credit score requirements
• Can be used to purchase duplexes, triplexes, quadplexes, or condominiums
• May have lower mortgage insurance premiums than private mortgage insurance
Cons
• Loan limits of $472,030 to $1,089,300 for a single-family home, depending on the cost of living by state
• May require an inspection and higher property standards
• Can only be used for buying a primary residence
• May require mortgage insurance for the life of the loan
Tips if You’re Considering Multiple FHA Loans
Consider these tips to be prepared to apply for a second FHA loan: To lower your DTI, you’ll either need to increase your income or lower your debt. Using your first home for rental income can demonstrate to lenders that you can afford having two mortgages. When evaluating debt, remember that established credit that’s in good standing is viewed more favorably than newer credit accounts.
Building more equity in the home you currently own is another option to help qualify for a second FHA loan. If possible, aim for at least 25% equity before applying for a second FHA loan, as this is the minimum required if you are citing an increase in family size as the exception.
The Takeaway
Can you get an FHA loan if you already have an FHA loan? Yes, but there are specific exceptions you’ll need to meet in order to qualify, and the new property must be used as a primary residence for at least one year. Not able to take out two FHA loans at once? Don’t worry. There are other options for borrowing that may suit your needs.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.
SoFi Mortgages: simple, smart, and so affordable.
FAQ
What will disqualify you from an FHA loan?
Borrowers could be disqualified from an FHA loan based on a high debt-to-income ratio, poor credit, or insufficient funds to cover the down payment, closing costs, and monthly mortgage payment.
Can you qualify for FHA twice?
Yes, you can get a second FHA loan if you are relocating for a new job, move at least 100 miles away, have an increase in family size, or vacate a jointly owned property. Borrowers who previously co-signed on someone else’s FHA loan may also qualify for FHA twice.
What is the 100 mile rule for FHA loans?
The 100-mile rule allows borrowers to get a second FHA loan without having to sell an existing property with a FHA-backed mortgage if they’re moving for employment-related reasons or buying a new primary residence that’s at least 100 miles away.
Photo credit: iStock/nazar_ab
*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.
¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
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