The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
If you’re planning to buy a house in the near future, you may be paying extra attention to your credit. While good credit can help you qualify for the best terms and interest rates, bad credit can stand in the way of your dream home.
If your credit could use a little TLC, continue reading to learn more about credit repair for first-time home buyers and discover helpful tips to improve your credit.
Table of contents:
1. Pay your bills on time
2. Look for errors on your credit report
3. Dispute any inaccuracies
4. Lower your credit utilization
5. Consider consolidating your debt
6. Leave old credit accounts open
7. Avoid opening new credit accounts
8. Get help from a credit repair company
1. Pay your bills on time
Since payment history is the number one factor that affects your credit score, the first step in repairing your credit is getting current with your bills. Late payments, especially those over 30 days past due, can cause your credit to take a significant hit. Not to mention late payments can stay on your credit report for seven years and continue to negatively impact your credit, although the effect lessens over time.
If you’ve missed payments in the past, it’s important to get back on track with making your payments on time. Consider creating a budget, making a list of all your bills, noting their due dates and setting reminders so you don’t forget to pay them. Set up automated payments wherever possible.
Pro tip: Build an emergency fund so you’re still able to pay your bills even if you get hit with an unexpected expense.
2. Look for errors on your credit report
Errors on your credit report could negatively impact your ability to secure a mortgage. In fact, a recent study by Consumer Reports found that 34 percent of participants had at least one error on their credit report.
According to the Consumer Financial Protection Bureau, common errors to look for include:
Identity errors: These include inaccuracies regarding your personal information. For instance, your name, address or phone number may be incorrect or misspelled. Make sure to look for accounts that don’t belong to you and could be the result of identity theft.
Reporting errors: These are errors regarding the state of your accounts. For example, accounts you previously closed that are inaccurately reported as open.
Data errors: These could be duplicate accounts or incorrect information that had previously been corrected.
Balance errors: These include wrong balances or credit limits.
While not all errors affect your credit score, incorrect payment dates or account statuses can have a significant adverse effect, so it’s important to review your credit report before buying a house.
Pro tip: You can get a copy of your credit report from each of the three credit bureaus for free at AnnualCreditReport.com.
3. Dispute any inaccuracies
If you identify any errors on your credit report, you will want to get the inaccurate information removed if you can. File a dispute with the credit bureau via their website, mail or phone.
Regardless of the method you choose, make sure to clearly state what items you’re challenging and why the information is wrong. Consider including a copy of your credit report and highlighting or circling the errors.
Once you file a dispute, the credit bureau has 90 days to complete an investigation into your claim. If the bureau confirms that the error is inaccurate, they will remove it from your credit report. You should see the correction reflected in your score within a few weeks.
Pro tip: Use the Federal Trade Commission’s sample letter as a guide when writing your letter.
4. Lower your credit utilization
Credit utilization is another factor that influences your credit. Your credit utilization ratio is the amount of credit you’re using in relation to the amount of credit available to you.
Keeping your credit utilization low shows mortgage lenders that you aren’t too reliant on credit. Meanwhile, a high credit utilization ratio could indicate that you may struggle to pay your mortgage.
Here are a few strategies to lower your credit utilization ratio:
Pay off large purchases immediately: If you make a large purchase on your credit card, consider paying it off the same day if possible.
Make multiple payments each month: Get in the habit of paying your balance multiple times each month so the credit bureaus are more likely to see a lower number when your credit card issuer reports your statement balance.
Request a credit limit increase: Contact your credit card issuer to see if you qualify for a credit limit increase. Keep in mind that this may result in a hard inquiry, which could temporarily lower your score.
Lower your spending: Consider switching to cash or a debit card to decrease the amount of money you charge to your credit card each month.
Pro tip: Generally, experts recommend keeping your credit utilization below 30 percent. For example, if you only have one credit card and the limit is $10,000, you should aim to spend less than $3,000 each month.
5. Consider consolidating your debt
If you struggle to keep track of your different credit accounts and their due dates, consider consolidating your debt into a single monthly payment. This strategy can help you pay off debt quicker and avoid late payments. However, in order for debt consolidation to make sense, you should aim to get a lower interest rate.
There are a few different ways to consolidate your debt, including:
Zero-percent APR balance transfer credit card: Transfer your credit card debt to a new card, specifically during the 0 percent APR introductory period. Aim to pay down your debt before the introductory period ends—typically between 12 and 21 months.
Debt consolidation loan: Get a debt consolidation loan from a bank, credit union or online lender. Compare options to find the lowest interest rate.
Home equity loan: A home equity loan involves using the equity in your home as collateral to borrow money. While home equity loans typically have lower interest rates, you could end up losing your home if you fail to make payments.
401(k) loan: If you have a retirement account, you can borrow money from your savings. Keep in mind that taking out a 401(k) loan can hurt your retirement savings since you cannot continue to invest until you pay back the loan.
Pro tip: Weigh the benefits and drawbacks to find the best debt consolidation option for your financial situation.
6. Leave old credit accounts open
You may consider closing old credit accounts that you don’t use anymore, but that can actually hurt your credit. FICO® takes into account your length of credit history when calculating your score.
A long credit history signals to mortgage lenders that you have experience using credit and provides a more thorough track record of your credit history.
You should leave old credit accounts open unless you have another reason for closing them, such as an annual fee.
Pro tip: If your oldest account charges an annual fee, consider calling the credit card issuer to see if you can get it waived.
7. Avoid opening new credit accounts
Opening too many credit accounts in a short time frame can be a red flag to lenders. They may come to the conclusion that you’re financially unstable and are relying on credit to get by. As a result, they may consider you more likely to fall behind on payments.
Additionally, too many hard inquiries can hurt your credit. While a single hard inquiry typically only lowers your score a small amount, multiple hard inquiries may cause a noticeable drop in your score.
Pro tip: Try to wait six months between credit card applications.
8. Get help from a credit repair company
If you need help repairing your credit in preparation for buying a house, consider looking into credit repair services. A credit repair company can closely examine your credit report and help you identify negative items that might be wrongfully hurting your credit. The company will then challenge the inaccuracies on your behalf so they might no longer impact you.
Pro tip: Research each company and read reviews to avoid running into credit repair scams.
Why is credit important when buying a home?
Credit is important when buying a home if you plan to take out a mortgage. A good credit score will boost your likelihood of qualifying for a mortgage with a lower interest rate and better terms. This can end up saving you thousands of dollars over the course of your mortgage.
What does your credit score need to be to buy a house for the first time?
The credit score needed to buy a house varies depending on the type of loan you want. For most conventional mortgages, borrowers need a credit score of 620 or higher to qualify. Meanwhile, an FHA loan requires a minimum credit score of 500. Generally, the higher your credit score, the more favorable interest rates and terms you’ll be approved for.
Need help repairing your credit before buying a home? Lexington Law Firm could help you identify and address inaccurate negative items that may be damaging your score. Sign up for a free credit assessment to establish your starting point and see what services may be right for you.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Brittany Sifontes
Attorney
Prior to joining Lexington, Brittany practiced a mix of criminal law and family law.
Brittany began her legal career at the Maricopa County Public Defender’s Office, and then moved into private practice. Brittany represented clients with charges ranging from drug sales, to sexual related offenses, to homicides. Brittany appeared in several hundred criminal court hearings, including felony and misdemeanor trials, evidentiary hearings, and pretrial hearings. In addition to criminal cases, Brittany also represented persons and families in a variety of family court matters including dissolution of marriage, legal separation, child support, paternity, parenting time, legal decision-making (formerly “custody”), spousal maintenance, modifications and enforcement of existing orders, relocation, and orders of protection. As a result, Brittany has extensive courtroom experience. Brittany attended the University of Colorado at Boulder for her undergraduate degree and attended Arizona Summit Law School for her law degree. At Arizona Summit Law school, Brittany graduated Summa Cum Laude and ranked 11th in her graduating class.
Debt consolidation loans work by giving you access to a lump sum of money you use to pay off your unsecured debts, like credit cards, in one fell swoop. You’re then left with only one payment on your new debt consolidation loan.
Debt consolidation loans are a smart way to pay off debt if you can qualify for a lower annual percentage rate compared to the average rate across your existing debts. This lower rate means you’ll save money on interest, and you’ll likely get out of debt faster.
Debt consolidation loans also have fixed rates and terms, so you’ll pay the same amount every month, which makes the payment easier to budget for than revolving debts like credit cards. Plus, you’ll know exactly what day you’ll be debt-free, which can be especially motivating.
Where can I find debt consolidation loans?
You can find debt consolidation loans at banks, credit unions and online lenders.
Banks typically offer the lowest interest rates on debt consolidation loans, but you may need good or excellent credit (a score of 690 or higher) to qualify. If you already have a relationship with a bank, it’s worth asking what their loan options and qualification criteria are before considering other lenders.
Credit unions also offer lower-rate loans and may be more lenient to borrowers with fair or bad credit (a score of 689 or lower). You’ll need to join the credit union before applying for a loan, but the membership process is typically quick and affordable. You can usually fill out the application online, and you may need to make an initial deposit of $5 to $25.
Online loans are available to borrowers across the credit spectrum, and they’re often the most convenient option. Some online lenders can make immediate approval decisions and fund loans the same or next day. Many also let you pre-qualify, which means you can check your potential loan terms without hurting your credit score. Since online loans can have a higher cost of borrowing, it’s best to pre-qualify with multiple lenders to compare rates.
How do I qualify for a debt consolidation loan?
You qualify for a debt consolidation loan based on the information in your application. Lenders typically look at three core factors: credit score, credit history and debt-to-income ratio.
Some lenders may publish minimum credit score or minimum credit history requirements to apply. Most like to see a good credit score and two to three years of credit history that shows responsible repayment behavior.
You’ll also need to list your income. This gives lenders an idea of your debt-to-income ratio, which divides your total monthly debt payments by your gross monthly income, and helps lenders assess your ability to repay a debt consolidation loan.
How does a debt consolidation loan affect my credit score?
A debt consolidation loan should help build your credit score, as long as you use the loan to successfully pay off your debts and you pay back the new loan on time.
You’ll also undergo a hard credit check when you apply, which knocks a few points off your score, but this is temporary. Any missed payments on the loan can hurt your score.
Steps to getting a debt consolidation loan
1. Add up your debts
The first step to getting a debt consolidation loan is knowing how much debt you have. Make a list of unsecured debts you’d like to consolidate, since this is the loan amount you’ll need to apply for.
You can also calculate the average annual percentage rate across your current debts using a debt consolidation calculator. You’ll want to get a debt consolidation loan with a lower rate in order to save money on interest and pay off the debt faster.
2. Pre-qualify if you can
Not all lenders offer pre-qualification, so take advantage of those that do. This typically involves filling out a short application with basic personal information, including your Social Security number. The lender will run a soft credit check, which won’t hurt your credit score, and then display potential loan offers.
If your lender doesn’t offer pre-qualification, it doesn’t hurt to call and see what information they can tell you over the phone about applicant requirements, including minimum credit score.
3. Apply for the loan
Once you’ve pre-qualified or decided on a lender, it’s time to fill out your loan application.
A loan application asks for personal information — think name, birthdate, address and contact details — as well as information about the loan you want, including loan purpose, desired loan amount and repayment term. You may need to show proof of identity, address, employment and income. Once you submit your application, you’ll undergo a hard credit check.
Most applications are available online, but a smaller bank or credit union may ask you to visit a branch.
You can typically expect to hear back from the lender within a few days.
4. Get funded and pay off your debts
Once approved, funding time is typically within a week, though some lenders may offer same- or next-day funding. Lenders can deposit the loan funds in your bank account, but some may offer to send the money directly to your creditors on your behalf, saving you that step.
This is a convenient way to pay off your debts, but make sure to check your accounts to confirm your balances are $0. If the lender doesn’t offer direct payment, use the loan funds to pay off your debts yourself.
5. Pay back your new loan
Once your debts are paid off, you’re left with only your new loan payment. Your first payment is typically due one month after funding and will be due every month until the loan is paid off. Make sure you add this payment to your budget. Missing a loan payment can result in costly late fees and hurt your credit score.
When to avoid debt consolidation loans
Debt consolidation loans aren’t the right choice for everyone, and they can be risky, particularly if you’re someone who struggles to stay out of debt. For example, if you use a debt consolidation loan to pay off your credit cards, but then start using your credit cards again, you’ll have even more debt than you started with. This can hurt your credit score and leave you struggling to repay your loan.
Terms on debt consolidation loans can also be long — sometimes up to seven years, depending on the lender. If you have good or excellent credit, you may want to consider other types of consolidation, like balance transfer cards, which come with 0% promotional periods. This can help you pay off debt faster, since there’s no interest.
If you can’t qualify for a balance transfer card or for a low enough rate on a debt consolidation loan, it may be best to choose a different debt payoff method.
Both a loan modification and a loan refinance can lower your monthly payments and help you save money. However, they are not the same thing. Depending on your circumstances, one strategy will make more sense than the other.
If you’re behind on your mortgage payments due to a financial hardship, for example, you might seek out a loan modification. A modification alters the terms of your current loan and can help you avoid default or foreclosure.
If, on the other hand, you’re up to date on your loan payments and looking to save money, you might opt to refinance. This involves taking out a new loan (ideally with better rates and terms) and using it to pay off your existing loan.
Here’s a closer look at loan modification vs. refinance, how each lending option works, and when to choose one or the other.
What Is a Loan Modification?
A loan modification changes the terms of a loan to make the monthly payments more affordable. It’s a strategy that most commonly comes into play with mortgages. A home loan modification is a change in the way the home mortgage loan is structured, primarily to provide some financial relief for struggling homeowners.
Unlike refinancing a mortgage, which pays off the current home loan and replaces it with a new one, a loan modification changes the terms and conditions of the current home loan. These changes might include:
• A new repayment timetable. A loan modification may extend the term of the loan, allowing the borrower to have more time to pay off the loan.
• A lower interest rate. Loan modifications may allow borrowers to lower the interest rates on an existing loan. A lower interest rate can reduce a borrower’s monthly payment.
• Switching from an adjustable rate to a fixed rate. If you currently have an adjustable-rate loan, a loan modification might allow you to change it to a fixed-rate loan. A fixed-rate loan may be easier to manage, since it offers consistent monthly payments over the life of the loan.
A loan modification can be hard to qualify for, as lenders are under no obligation to change the terms and conditions of a loan, even if the borrower is behind on payments. A lender will typically request documents to show financial hardship, such as hardship letters, bank statements, tax returns, and proof of income.
While loan modifications are most common for secured loans, like home mortgages, it’s also possible to get student loan modifications and even personal loan modifications. 💡 Quick Tip: A low-interest personal loan can consolidate your debts, lower your monthly payments, and help you get out of debt sooner.
What Is Refinancing a Loan?
A loan refinance doesn’t just restructure the terms of an existing loan — it replaces the current loan with a new loan that typically has a different interest rate, a longer or shorter term, or both. You’ll need to apply for a new loan, typically with a new lender. Once approved, you use the new loan to pay off the old loan. Moving forward, you only make payments on the new loan.
Refinancing a loan can make sense if you can:
• Qualify for a lower interest rate. The classic reason to refi any type of loan is to lower your interest rate. With home loans, however, you’ll want to consider fees and closing costs involved in a mortgage refinance, since they can eat into any savings you might get with the lower rate.
• Extend the repayment terms. Having a longer period of time to pay off a loan generally lowers the monthly payment and can relieve a borrower’s financial stress. Just keep in mind that extending the term of a loan generally increases the amount of interest you pay, increasing the total cost of the loan.
• Shorten the loan repayment time. While refinancing a loan to a shorter repayment term may increase the monthly loan payments, it can reduce the overall cost of the loan by allowing you to pay off the debt faster. This can result in a significant cost savings.
Recommended: What Are Personal Loans Used For?
Refinance vs Loan Modification: Pros and Cons
Loan refinance is typically something a borrower chooses to do, whereas loan modification is generally something a borrower needs to do, often as a last resort.
Here’s a look at the pros and cons of each option.
Loan Modification
Refinancing
Pros
Cons
Pros
Cons
Avoid loan default and foreclosure
Could negatively impact credit
May be able to lower interest rate
You’ll need solid credit and income
Lower your monthly payment
Cash out is not an option
May be able to shorten or lengthen your loan term
Closing costs may lower overall savings
Avoid closing costs
Lenders not required to grant modification
May be able to turn home equity into cash
You could reset the clock on your loan
Benefits of Loan Modification
While a loan modification is rarely a borrower’s first choice, it comes with some advantages. Here are a few to consider.
• Avoid default and foreclosure. Getting a loan modification can help you avoid defaulting on your mortgage and potentially losing your home as a result of missing mortgage payments.
• Change the loan’s terms. It may be possible to increase the length of your loan, which would lower your monthly payment. Or, if the original interest rate was variable, you might be able to switch to a fixed rate, which could result in savings over the life of the loan.
• Avoid closing costs. Unlike a loan refinance, a loan modification allows you to keep the same loan. This helps you avoid having to pay closing costs (or other fees) that come with getting a new loan.
Drawbacks of Loan Modification
Since loan modification is generally an effort to prevent foreclosure on the borrower’s home, there are some drawbacks to be aware of.
• It could have a negative effect on your credit. A loan modification on a credit report is typically a negative entry and could lower your credit score. However, having a foreclosure — or even missed payments — can be more detrimental to a person’s overall creditworthiness.
• Tapping home equity for cash is not an option. Unlike refinancing, a loan modification cannot be used to tap home equity for an extra lump sum of cash (called a cash-out refi). If your monthly payments are lower after modification, though, you may have more funds to pay other expenses each month.
• There is a hardship requirement. It’s typically necessary to prove financial hardship to qualify for loan modification. Lenders may want to see that your extenuating financial circumstances are involuntary and that you’ve made an effort to address them, or have a plan to do so, before considering loan modification.
Recommended: Guide to Mortgage Relief Programs
Benefits of Refinancing a Loan
For borrowers with a strong financial foundation, refinancing a mortgage or other type of loan comes with a number of benefits. Here are some to consider.
• You may be able to get a lower interest rate. If your credit and income is strong, you may be able to qualify for an interest rate that is lower than your current loan, which could mean a savings over the life of the loan.
• You may be able to shorten or extend the term of the loan. A shorter loan term can mean higher monthly payments but is likely to result in an overall savings. A longer loan term generally means lower monthly payments, but may increase your costs.
• You may be able to pull cash out of your home. If you opt for a cash-out refinance, you can turn some of your equity in your home into cash that you can use however you want. With this type of refinance, the new loan is for a greater amount than what is owed, the old loan is paid off, and the excess cash can be used for things like home renovations or credit card consolidation. 💡 Quick Tip: If you’ve got high-interest credit card debt, a personal loan is one way to get control of it. But you’ll want to make sure the loan’s interest rate is much lower than the credit cards’ rates — and that you can make the monthly payments.
Drawbacks of Refinancing a Loan
Refinancing a loan also comes with some disadvantages. Here are some to keep in mind.
• You’ll need strong credit and income. Lenders who offer refinancing typically want to see that you are in a solid financial position before they issue you a new loan. If your situation has improved since you originally financed, you could qualify for better rates and terms.
• Closing costs can be steep. When refinancing a mortgage, you typically need to pay closing costs. Before choosing a mortgage refi, you’ll want to look closely at any closing costs a lender charges, and whether those costs are paid in cash or rolled into the new mortgage loan. Consider how quickly you’ll be able to recoup those costs to determine if the refinance is worth it.
• You could set yourself back on loan payoff. When you refinance a loan, you can choose a new loan term. If you’re already five years into a 30-year mortgage and you refinance for a new 30-year loan, for example, you’ll be in debt five years longer than you originally planned. And if you don’t get a lower interest rate, extending your term can increase your costs.
Is It Better to Refinance or Get a Loan Modification?
It all depends on your situation. If you have solid credit and are current on your loan payments, you’ll likely want to choose refinancing over loan modification. To qualify for a refinance, you’ll need to have a loan in good standing and prove that you make enough money to absorb the new payments.
If you’re behind on your loan payments and trying to avoid negative consequences (like loan default or foreclosure on your home), your best option is likely going to be loan modification. Provided the lender is willing, you may be able to change the rate or terms of your loan to make repayment more manageable. This may be more agreeable to a lender than having to take expensive legal action against you.
Recommended: 11 Types of Personal Loans & Their Differences
Alternatives to Refinancing and Loan Modification
If you’re having trouble making your mortgage payments or just looking for a way to save money on a debt, here are some other options to consider besides refinancing and loan modification.
Mortgage Forbearance
For borrowers facing short-term financial challenges, a mortgage forbearance may be an option to consider.
Lenders may grant a term of forbearance — typically three to six months, with the possibility of extending the term — during which the borrower doesn’t make loan payments or makes reduced payments. During that time, the lender also agrees not to pursue foreclosure.
As with a loan modification, proof of hardship is typically required. A lender’s definition of hardship may include divorce, job loss, natural disasters, costs associated with medical emergencies, and more.
During a period of forbearance, interest will continue to accrue, and the borrower will still be responsible for expenses such as homeowners insurance and property taxes.
At the end of the forbearance period, the borrower may have to repay any missed payments in addition to accrued interest. Some lenders may work with the borrower to set up a repayment plan rather than requiring one lump repayment.
Mortgage Recasting
With a mortgage recast, you make a lump sum payment toward the principal balance of the loan. The lender will then recast, or re-amortize, your remaining loan repayment schedule. Since the principal amount is smaller after the lump-sum payment is made, each monthly payment for the remaining life of the loan will be smaller, even though your interest rate and term remain the same.
Making Extra Principal Payments
With any type of loan, you may be able to lower your borrowing costs by occasionally (or regularly) making extra payments towards principal. This can help you pay back what you borrowed ahead of schedule and reduce your costs.
Before you prepay any type of loan, however, you’ll want to make sure the lender does not charge a prepayment penalty, since that might wipe out any savings. You’ll also want to make sure that the lender applies any extra payments you make directly towards principal (and not towards future monthly payments).
The Takeaway
Loan modification vs loan refinancing…which one wins?
It depends on your financial situation. If you’re dealing with financial challenges and at risk of home foreclosure, you may want to look into a loan modification, which could be easier to qualify for than loan refinancing.
If you’re interested in getting a lower interest rate or lowering your monthly debt payment, refinancing likely makes more sense. A refinance may also make sense if you’re looking to tap your home equity to access extra cash. With a cash-out refi, you replace your current mortgage with a new, larger loan and receive the excess amount in cash.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
FAQ
What are the disadvantages of loan modification?
A loan modification typically comes with a hardship requirement. A lender may ask to see proof that your financial circumstances are involuntary and that you’ve made an effort to address them before considering loan modification.
A loan modification can also have a temporary negative effect on your credit.
Is a loan modification bad for your credit?
A lender may report a loan modification to the credit bureaus as a type of settlement or adjustment to the loan’s terms, which could negatively impact on your credit. However, the effect will likely be less (and shorter in duration) than the impact a series of late or missed payments or a foreclosure on your home would have.
Photo credit: iStock/AlexSecret
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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
While the dream of homeownership might seem elusive on a tight budget, the availability of low income home loans offers a beacon of hope.
These specialized loans come in handy, particularly when the obstacles of saving for a down payment loom large—a common hurdle if you’re already strapped with rent payments.
So if you’re wondering how to bridge the financial gap between renting and owning, read on to explore the various low income home loan programs that could unlock the door to your future home.
Verify your home buying eligibility. Start here
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Can I buy a house with low income?
Yes, you can buy a house with a low income by qualifying for housing assistance programs and special mortgage loans. That’s because there is no minimum income requirement to buy a house.
However, your ability to do so will depend on a variety of factors specific to your financial situation. A mortgage lender will examine your credit score, debt-to-income ratio, and down payment to determine if you qualify.
Check your mortgage eligibility. Start here
What are low income home loans?
The path to homeownership can be fraught with challenges, particularly for those with limited financial resources. Enter low income home loans—a specialized type of mortgage designed to level the playing field for buyers facing financial barriers.
Low-income mortgage programs focus on addressing the common challenges that low-income earners encounter, such as managing debt, maintaining less-than-stellar credit scores, and struggling to save for a significant down payment.
Verify your home buying eligibility. Start here
Minimal down payment requirements: One of the most daunting aspects of buying a home is accumulating a large down payment. Low income home loans often require smaller down payments, making it easier for buyers to make the initial leap.
Lenient credit criteria: Having a perfect credit score is not always feasible, especially when living on a limited income. These loans often have more flexible credit requirements, allowing for a broader range of credit histories.
Reduced costs at closing: High closing costs can be another hurdle. Low income home loan programs may offer reduced or even waived closing costs in certain circumstances.
Competitive mortgage interest rates: High interest rates can quickly make a mortgage unaffordable. Low income home loans often feature competitive interest rates, reducing long-term costs.
Lower mortgage insurance premiums: Some programs offer reduced premiums for mortgage insurance, further lowering monthly payments.
Interestingly enough, some of these programs often have income caps, essentially barring applicants who have incomes that are considered too high. This ensures that the programs benefit those who need them most.
Requirements for low income home loans
Your ability to qualify for a loan is not solely based on your income. Lenders will assess your debt-to-income (DTI) ratio, a key metric that represents your monthly debts as a percentage of your monthly income. Generally, a DTI under 35% is viewed as favorable, making you a more appealing candidate for a mortgage.
If saving a down payment is your chief concern, don’t worry; there are plenty of options that require minimal, or sometimes zero, down payments. Despite common misconceptions, a 20% down payment is not a universal requirement.
Additional Assistance
Beyond the loan itself, there are various homebuyer assistance programs that can help with the down payment and closing costs. Some of these are structured as grants that don’t require repayment, making it easier to achieve the dream of owning a home.
Navigating the complexities of mortgages and home buying can be intimidating, but low income home loans and assistance programs offer a lifeline to those who dream of owning their own home. These financial products and services are tailored to alleviate the most common obstacles, offering a viable path to homeownership for those who may have thought it was out of reach.
Low income home loans
Low income home buyers have plenty of loan options and special assistance programs to help with a home purchase. Here’s what you can expect.
Check your mortgage eligibility. Start here
Loan Type
Credit Score
Down Payment
Unique Requirements
HomeReady
Generally 620
As low as 3%
Income limits based on area, homebuyer education course required
Home Possible
Generally 660
As low as 3%
Must be primary residence, income limits may apply, can include 1-4 unit properties
Must be a qualifying service member, veteran, or eligible spouse; primary residence only
USDA Loans
Usually 640
No down payment required
Must be in a qualifying rural area, income limits apply, primary residence only
HomeReady and Home Possible mortgages
Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible loan are geared toward lower-income home buyers. You need only 3% down to qualify, and there is no minimum “required contribution” from the borrower. That means the money can come from a gift, grant, or loan from an acceptable source.
Even better, the home seller can pay closing costs worth up to 3% of the purchase price. Instead of negotiating a lower sales price, try asking the seller to cover your closing costs.
Private mortgage insurance (PMI) may also be discounted for these low income home loans. You’re likely to get a lower PMI rate than borrowers with standard conventional mortgages, which could save you a lot of money from month to month.
“This is the biggest benefit,” says Jon Meyer, The Mortgage Reports loan expert and licensed mortgage loan originator. “The PMI is offered at a lower rate than with a standard conventional loan.”
Finally, Home Possible and HomeReady might make special allowances for applicants with low incomes. For instance, HomeReady lets you add income from a renter on your mortgage application, as long as they’ve lived with you for at least a year prior. This can help boost your qualifying income and make it easier to get financing.
You might qualify for HomeReady or Home Possible if your household income is below local income limits and you have a credit score between 620 and 660.
FHA loans
FHA loans offer flexible approval requirements for repeat and first-time home buyers alike. This program, which the Federal Housing Administration backs, relaxes borrowers’ standards to get a mortgage. This can open up the home-buying process to more renters.
You might be able to get an FHA home loan with a debt-to-income ratio (DTI) up to 45% or a credit score as low as 580 while paying only 3.5% down
Select FHA lenders even allow credit scores as low as 500, provided the buyer can make a 10% down payment
Thanks to these perks and others, the FHA loan is one of the most popular low-down-payment mortgages on the market.
Check your FHA loan eligibility. Start here
VA loans
Veterans Affairs-backed VA loans provide military homebuyers with a number of advantages.
No down payment requirement. You can finance 100% of the purchase price. You can also refinance 100% of your home’s value using a VA loan
No mortgage insurance. But you will pay a one-time VA Funding Fee. You can wrap it into the loan amount.
No minimum credit score. Although lenders are allowed to add their own minimums. Those that do often require a FICO score of at least 580 to 620.
Sellers can pay up to 4% of the purchase price in closing costs. So if you find a motivated seller, you could potentially get into a home with nothing out of pocket
If you’re a veteran, active-duty service member, or surviving spouse, the VA mortgage program should be your first stop.
Check your VA loan eligibility. Start here
USDA loans
If you’re not buying in a large city, you may qualify for a USDA home loan. Officially called the Single-Family Housing Guaranteed Loan Program, the USDA loan was created to help moderate- and low-income borrowers buy homes in rural areas.
With a USDA loan, you can buy a home with no money down. The only catch is that you must buy in a USDA-approved rural area (though these are more widespread than you might think). You can find out if the property you’re buying is located in a USDA-eligible rural area and whether you meet local income limits using the USDA’s eligibility maps.
Your monthly payments might be cheaper, too. That’s because interest and mortgage insurance rates are typically lower for USDA loans than for FHA or conforming loans.
There are two types of USDA loans.
The Guaranteed Program is for buyers with incomes up to 115% of their Area Median Income (AMI)
The Direct Program is for those with incomes between 50% and 80% of the AMI
Standard USDA-guaranteed loans are available from many mainstream lenders. But the Direct program requires borrowers to work directly with the U.S. Department of Agriculture.
You typically need a credit score of 640 or higher to qualify.
Check your USDA loan eligibility. Start here
Low income home loan programs
Aside from mortgages that are designed to help people with low incomes buy a home, there are also a number of other programs that offer help to make homeownership more accessible.
Verify your home buying eligibility. Start here
Program
Description
Who Is Eligible
Hud Homes
Discounted homes sold by the Department of Housing and Urban Development.
Low- to moderate-income families, with preference for those who will make it their primary residence. May include single-family homes.
Housing Choice Voucher Program
Vouchers to subsidize the cost of housing in the private market.
Low-income families; must meet income and other criteria set by state and local housing programs.
Good Neighbor Next Door
Significant discounts on homes for teachers, firefighters, police officers, and EMTs.
Must commit to living in the property as a primary residence for at least 36 months. Includes single-family homes.
HFA Loans
Loans offered by state Housing Finance Agencies with reduced interest rates and down payment assistance.
First-time or repeat buyers with low to moderate incomes must meet income requirements. Often, it must be a primary residence.
Down Payment Assistance
Grants or loans to cover the down payment and sometimes closing costs.
Typically for low- to moderate-income families, though criteria can vary by program. Often for single-family homes.
State or Local Assistance
Various grants, loans, or tax credits are offered at the state or local level.
Eligibility varies but usually targets low- to moderate-income families. May include single-family homes.
Mortgage Credit Certificates
Tax credit to reduce federal income tax liability.
First-time homebuyers who meet income requirements; must be primary residence.
Manufactured and Mobile Homes
Loans or grants specifically for manufactured or mobile homes.
Low- to moderate-income families; must meet criteria set by specific housing programs. Usually must be primary residence.
Hud Homes
When the FHA forecloses on homes, those properties are often put up for sale as HUD Homes. And, you can generally purchase one at a steep discount. To qualify for a HUD Home, it will need to be your primary residence for at least 12 months. Additionally, you must not have purchased another HUD in the past 24 months.
Keep in mind that HUD Homes are sold as-is. Many are fixer-uppers. Moreover, HUD Homes are purchased through a bidding process. You’ll need a real estate agent or mortgage broker licensed with HUD to bid on an FHA property.
You can find HUD Homes on the official HUD website, hudhomestore.com. There, you’ll see all HUD real estate owned (REO) single-family properties in your area.
Good Neighbor Next Door
The Good Neighbor Next Door program offers unique benefits for nurses, first responders, and teachers. If you’re eligible, you can buy HUD foreclosure homes at a 50% discount. Use an FHA mortgage, and you only need $100 for a down payment.
You can find the homes on the U.S. Department of Housing and Urban Development website. You’ll also need a HUD-licensed real estate agent to put your offer in for you.
If your offer is accepted and you qualify for financing, you get the home. The 50% discount makes homeownership a lot more affordable. However, be aware that this discount is actually a second mortgage. But it has no interest and requires no payments. Live in the home for three years, and the second mortgage is forgiven entirely.
HFA home loans
Not to be confused with FHA loans, HFA loans are offered in partnership with state and local Housing Finance Authorities.
Many HFA loans are conventional mortgages backed by Fannie Mae and Freddie Mac. They may require as little as 3% down, and many HFA programs can be used with down payment assistance to reduce the upfront cost of home buying.
Borrowers who qualify for an HFA loan might also be in line for discounted mortgage rates and mortgage insurance premiums. To qualify, you’ll typically need a credit score of at least 620. But eligibility requirements vary by program.
Find and contact your state’s public housing finance agency or authority to learn more and see if you qualify. Also, be aware that this type of loan program will require additional approval steps that may make loan closing take longer.
Down payment assistance programs (DPAs)
Down payment assistance is exactly what it sounds like. It provides help with down payments on home purchases and often closing costs. Government agencies, nonprofits, and other sources commonly offer down payment and closing cost assistance. They are usually in the form of a grant or loan (though the loans may be forgiven if you stay in the house for five to ten years).
Most DPA programs target low-income home buyers and have guidelines that make qualifying easier. Some, however, provide assistance to people who buy in “underserved” or “redevelopment” areas, regardless of income. Many DPA programs offer assistance worth tens of thousands of dollars.
Talk to a lender about your options. Start here
Mortgage Credit Certificates (MCCs)
Mortgage credit certificates (MCCs) can stretch your home-buying power. If you meet income requirements, you could get a tax credit equal to some percentage of your mortgage interest. Lenders are allowed to add this credit to your qualifying income when underwriting your mortgage. This allows you to qualify for a higher mortgage amount than you otherwise could.
There are numerous states, counties, and cities that issue mortgage credit certificates, and their regulations and amounts vary greatly. Check with your local housing finance authority to find out whether MCCs are available where you live.
Housing Choice Voucher Program
The Housing Choice Voucher homeownership program (HCV) provides both rental and home buying assistance to eligible low-income households. Also known as Section 8, this program allows low-income home buyers to use housing vouchers to purchase their own homes.
Because local public housing agencies run these voucher programs, eligibility varies depending on location. Still, you’ll likely need to meet the following requirements:
Program-specific income and employment conditions
Being a first-time home buyer
Completing a pre-assistance homeownership and counseling program
Keep in mind that not all states offer voucher programs, and some programs have waiting lists. Also, these programs could limit how much you can sell the home for later on. To find out if your area offers a participating program, use the HUD locator web tool.
Manufactured and mobile homes
A manufactured home usually costs less than a traditional, site-built home. When placed on approved foundations and taxed as real estate, manufactured homes can be financed with mainstream mortgage programs.
Many programs require slightly higher down payments or more restrictive terms for manufactured homes. HomeReady, for example, increases the minimum down payment from 3% to 5% if you finance a manufactured home. Other programs require the home to be brand new.
Additionally, there are often requirements regarding the year the home was built and the property’s foundation. These guidelines will vary between lenders. Mobile homes that are not classified as real estate can be purchased with personal loans like the FHA’s Title 2 program. These are not mortgages because the homes are not considered real estate.
Check your mortgage options. Start here
Tips for buying a house with low income
Whether you’re buying a new home or your first home, these tips can help you achieve your homeownership goals.
Verify your home buying eligibility. Start here
Improve your credit history
Improving your FICO score is the best way to increase your chances of loan approval and qualify for lower mortgage rates.
The credit score needed to purchase a home varies depending on the type of loan you apply for. Conventional loans typically require a score of at least 620, while FHA loans often require at least 580.
Start by pulling free credit reports from annualcreditreport.com to determine your current score. Next, consider a few of the common methods for increasing credit scores. The amount of work that you’ll need to do will depend on your personal financial situation.
As an example, if your credit score is low because you’re using too much of your available credit, you may benefit from a debt consolidation loan to tame your high-interest account balances and improve your credit utilization.
On the other hand, if your credit history reveals missed payments, you’ll need to show at least 12 months of regular, on-time payments to improve your score.
Save for a down payment
The average first-time home buyer puts just 13% down on a new home. Yet, many loan programs require as little as 3% down or no down payment at all.
Remember that you still have to pay closing costs, which are typically around 2% to 5% of your mortgage loan amount. If you put less than 20% down, you’ll almost certainly have to pay for mortgage insurance.
In addition, you may need cash reserves in your savings account. This assures lenders that you can make your monthly mortgage payments should you suffer a financial setback. However, don’t let the down payment scare you away from homeownership. Many buyers qualify without even knowing it.
Pay down debts
Paying down debts will lower your debt-to-income ratio and improve your odds of mortgage approval. This is especially true for those with high-interest credit card debt.
You’ll likely qualify for lower rates when you have:
A low debt-to-income ratio (DTI)
High credit score
3% to 5% down payment
Stable income for the past two consecutive years
Use a first-time home buyer program
First-time buyer programs offer flexible guidelines for qualified buyers. Plus, these special programs exist in every state to help low-income households achieve homeownership.
Unlike traditional conventional loans, the government backs many first-time buyer mortgages. This allows mortgage lenders to offer loans with better rates and lower credit score requirements than they normally would be able to.
Verify your low income home loan eligibility. Start here
Model your budget
Owning a home requires more than qualifying for a loan and making monthly mortgage payments. Homeowners are responsible for a variety of ongoing costs, including:
Homeowners insurance
Property taxes
Mortgage insurance (in many cases)
Utility bills
Ongoing home maintenance
Home improvements
Appliance repair and replacement
Home buyers who have experience paying these ongoing costs of homeownership will be better prepared for the big day when they get the keys to their dream home.
Plus, sticking to this model budget in the months and years before purchasing a home and then saving the money you would spend on housing costs, such as insurance premiums and utilities, is a great way to build cash reserves and save for a down payment.
Use a co-signer
If you’re on the edge of qualifying for your own loan, using a co-signer may be an option.
Essentially, when you buy a house with a co-signer, you and your co-signer are both responsible for making the monthly payments. You’ll both also build and share in the home’s equity. Purchasing a home with a co-signer is quite common among unmarried couples, friends, and family members.
FAQ: Low income home loans
Verify your home buying eligibility. Start here
How do you buy a house with low income?
To buy a house with a low income, you have to know which mortgage program will accept your application. A few popular options include: FHA loans (allowing low income and as little as 3.5 percent down with a 580 credit score); USDA loans (for low-income buyers in rural and suburban areas); VA loans (a zero-down option for veterans and service members); and HomeReady or Home Possible (conforming loans for low-income buyers with just 3 percent down).
I make $25K a year; can I buy a house?
Mortgage experts recommend spending no more than 28 percent of your gross monthly income on a housing payment. So if you make $25K per year, you can likely afford around $580 per month for a house payment. Assuming a fixed interest rate of 6 percent and a 3 percent down payment, that might buy you a house worth about $100,000. But that’s only a rough estimate. Talk with a mortgage lender to get the exact numbers for your situation.
How do I qualify for a low-income mortgage?
Whether or not you qualify for a low income home loan depends on the program. For example, you might qualify for an FHA mortgage with just 3.5 percent down and a 580 credit score. Or, if your house is in a qualified area and you’re below local income caps, you might be able to get a zero-down USDA mortgage. Veterans can qualify for a low-income mortgage using a VA loan. Or, you can apply for the mortgage with a co-borrower and qualify based on combined incomes.
What programs are available for first-time home buyers?
Low income home loans can help first-time home buyers overcome hurdles like low credit or income, smaller down payments, or high levels of debt. A few good programs for first-time home buyers include Freddie Mac’s Home Possible mortgage, Fannie Mae’s HomeReady mortgage, the Conventional 97 mortgage, and government-backed loans like FHA, USDA, and VA. First-time home buyers can also apply for down payment assistance grants through their state or local housing department.
Can the government help me buy a house?
There are a number of ways the government can help you buy a house. Perhaps the most direct way to get help is by applying for down payment assistance. This is a grant or low-interest loan to help you make a down payment. You can also buy a house using a government-backed mortgage, like the FHA or USDA. With these programs, the government essentially insures the loan, so you can buy with a lower income, credit score, or down payment than you could otherwise.
How do I buy a house without proof of income?
You can no longer buy a house without proof of income. You have to prove you can pay the loan back somehow. But there are modern alternatives to stated-income loans. For instance, you can show “proof of income” through bank statements, assets, or retirement accounts instead of W2 tax forms (the traditional method). Many people who want to buy a house without proof of income these days find a bank statement loan to be a good option.
How do you rent to own?
A lease option or rent-to-own home isn’t exactly what it sounds like. You don’t simply rent until the house is paid off. Instead, you usually pay a higher rent for a set period of time. That excess rent then goes toward a down payment when you buy the house at a later date. Rent-to-own might help you buy a house if you don’t have a lot of cash on hand right now or if you need to improve your credit score before applying for a mortgage. However, rent-to-own requires seller cooperation and comes with unique risks.
Can I rent-to-own with no down payment?
Rent-to-own does not mean you can buy a house with no down payment. When you rent-to-own, you’re paying extra rent each month that will go toward your down payment later on. And usually, rent-to-own contracts include an option fee that’s a lot like a down payment. The option fee is smaller. Think 1 percent of the purchase price instead of 3 to 20 percent. And that fee eventually goes toward your purchase. But it’s still a few thousand dollars you must pay upfront to secure the right to buy the home later on.
Can I get a grant to buy a house?
Qualified buyers can get a grant to buy a house. These are called down payment assistance grants. They won’t pay for the whole house, but they can help cover your down payment to make a mortgage more affordable. You’re most likely to qualify for a grant to buy a house if you have a low to moderate income and live in a target area.
What type of low income home loan is the easiest to qualify for?
FHA loans are generally the easiest low income home loan to qualify for. The federal government insures these loans, which means lenders can relax their qualifying rules. It’s possible for a home buyer with a credit score of 500 to get approved for an FHA loan, but most FHA lenders look for scores of 580 or better. And a FICO score of 580 lets you make the FHA’s minimum down payment of 3.5 percent.
How can I get a home loan with low monthly payments?
To get the lowest possible monthly payment, choose a 30-year loan term, find a cheaper home, put more money down, and make sure you have excellent credit before applying for your mortgage. If you can afford a 20 percent down payment, you can avoid PMI premiums, which lower your monthly payments even more. Veterans can get VA loans that require no PMI, regardless of their down payment size.
What’s the lowest amount you can put on a house?
Some home buyers can put no money down with a VA or USDA loan. Conventional loans will require at least 3 percent down, and FHA loans will require at least 3.5 percent down. Down payment assistance grants and loans could help you cover some or all of this down payment.
How much house can I afford if I make $30K a year?
If you make $30,000 a year, you could probably spend about $110,000 on a house, assuming you get a 30-year fixed-rate mortgage at 6 percent. This is a rough estimate. Your unique financial situation may be different. Getting a pre-approval from a lender is the only way to find your actual price range.
What are today’s mortgage rates for low income home loans?
Many low-income mortgage programs have lower interest rates than “standard” mortgage loans. So you might get a great deal.
However, interest rates vary depending on the borrower, the loan program, and the lender.
To find out where you stand, you’ll need to compare loan offers from several lenders and then choose your best deal.
Time to make a move? Let us find the right mortgage for you
If you’re feeling as if your student loans are hard to manage, you’re not alone. Currently, more than 43 million Americans are grappling with student loan debt, and the amounts they carry aren’t small. The average amount of federal student debt per borrower is $37,338, and for those with private student loan debt, the number is $54,921.
That kind of steep debt can be a challenge to pay back. In October of 2023, as the pandemic-driven freeze on loan repayment expired, a whopping 40% of borrowers missed payments.
If your loans feel like a real challenge to repay and you’re stressed about your financial situation, take heart. Not only are you far from the only person out there with this issue, but there are also a variety of ways you can get help with student loan debt. Here, you’ll learn more about those resources and steps you can take. Remember, you can and will get through this challenging moment. Now, read on for some guidance.
Where to Start
If you’re finding it hard to manage your student debt, your best first step may be to contact your loan servicer. Both the federal government and many private lenders assign a student loan servicer to each borrower. You can think of these servicers as go-betweens who monitor accounts, keep track of payments, and help borrowers maintain their accounts in good standing and switch plans, if need be. You can find your federal student loan servicer by logging into your student aid account; if you have private student loans, ask your lender how to make billing inquiries.
Student loan servicers can help you understand your options if you are finding your current loan hard to pay off. But do educate yourself before calling your servicer, because they are loan professionals vs. advocates for borrowers. It’s possible that they may offer options that are not necessarily in your best interest.
However, there is likely considerable value in hearing what alternatives are available so you can begin getting help with your student loan debt. You’ll learn more about options below. 💡 Quick Tip: Ready to refinance your student loan? You could save thousands.
What to Do If You’re in Default
When you default on your student loans, it means you are not repaying them according to your schedule. Almost 10% of borrowers can find themselves in default within the first three years of repayment.
When you first miss a student loan payment, your loan is considered to be delinquent, or late. The exact definition of being in default will depend on the kind of loan you have. Here are some guidelines:
• If you have federal student loans, you are considered to be in default when your payments are 270 days (or about nine months) late. With Perkins loans, you can be in default as soon as you don’t make a payment on its due date.
• For private student loans, many lenders consider a loan to be in default at the 90 day or three-month mark. Policies do vary, so check your loan’s promissory note for details.
You can find out if you are in default by contacting your loan servicer. If you are indeed in default, the consequences can be serious. The full amount of the loan becomes due ASAP. The loan holder can take other funds from you, late fees and interest can accrue, and your credit score can be negatively impacted, among other impacts.
Yes, that sounds scary, but this is a situation to be worked through; don’t let it define you or make you feel panicky. You might research the Fresh Start program for federal loans in default, or look into a student loan settlement, which would allow you to pay back less than what you owe. Student loan rehabilitation is another path and can be a one-shot solution to get federal loans out of default, repay them at a reasonable rate, and help build your credit score.
If you have private loans that are in default, it can be a wise move to speak to someone who specializes in student loans at the National Association for Consumer Advocates. You may then get assistance finding out if you can get a student loan settlement (that is, pay less than the full amount you owe) or find another road forward.
Next, though, learn about ways to avoid reaching the default stage if you are having trouble with your student loan debt.
Ways to Lower Your Federal Student Loan Payment
If you’re struggling to make your monthly federal student loan payments, it may be worth taking a look at your loan repayment plan. Federal student loans have several different loan repayment plans available, which may offer different monthly payment amounts based on your discretionary income and other factors.
Choosing a federal loan repayment plan that could give you a lower monthly payment, if available, could help you more easily make your monthly student loan payments. Consider these options.
Income-Driven Repayment
You may have been placed on the Standard Repayment Plan when you graduated, which is the standard for students repaying federal loans.
Under this plan, you have 10 years to pay off your student loans, and you make a fixed payment amount each month in order to ensure that your full loan is paid by the end of the 10 years. This plan may have higher monthly payments than other federal repayment plans.
In addition to the Standard Repayment plan, there are the following plans:
• One option is the Graduated Repayment Plan. Under this plan, loan payments are made over a 10-year period. But unlike the Standard Repayment plan, loan payments start at a lower amount and are gradually increased every two years.
• Another option when it comes to federal repayment plans is the Extended Repayment Plan. The Extended Repayment Plan has a longer repayment term option — up to 25 years. Monthly payments under this plan can be either fixed or graduated amounts. The extended repayment term means that you may have lower monthly payments.
Be aware, however, that choosing a longer repayment period could cost you more over the life of the loan due to interest that accrues every month that the loan is still outstanding. Think carefully about what might best suit your needs so you can pay off your student loan debt comfortably.
There are also four income-driven plans that calculate monthly payments based on a percentage of the borrower’s discretionary income. The percentage will vary based on the specific income-driven repayment plan you are enrolled in, but can be between 5% and 20%. Depending on the plan, repayment is extended over 20 or 25 years.
The plans available are:
• The new SAVE Plan (Saving on a Valuable Education; it goes into full effect on July 1, 2024), which replaces the REPAYE plan
• The PAYE Plan (Pay as You Earn)
• The ICR Plan (Income-contingent Repayment)
• The IBR Plan (Income-based Repayment)
With federal loans, you can change your repayment plan at any time. If you are interested in switching the plan you are enrolled in to better manage your debt, the Federal Student Aid website offers a repayment calculator that could help give you an idea of what your monthly payments may be like under each of the different payment plans.
This could help you make an informed decision about which plan may work best for your personal situation, based on what you qualify for. You could also use an online Student Loan Payoff Calculator to get an idea of when your loan payoff date may be based on your interest rate and monthly payments. Yes, crunching numbers can take a bit of time, but these tools can make it simple, show you your alternatives for managing your debt, and provide some much-needed peace of mind.
Deferment and Forbearance
If you’re really in dire straits and can’t afford to make your normal monthly payments on your student loans at all, you may be able to put your federal student loans into deferment or forbearance.
These programs offer options to temporarily reduce your monthly payment amount or pause your monthly payments entirely for a limited period of time. Not all borrowers are eligible for deferment or forbearance — in order to qualify you need to meet certain eligibility requirements.
A few points to note:
• If you’re interested in deferring your federal student loans to help with student loan debt, you’ll want to contact your student loan servicer. Your student loan servicer may require you to fill out paperwork or talk to an advisor before approving a deferral or forbearance of your student loans.
• Student loan servicers may offer assistance with student loan debt management at no cost. They also may be able to explain how student loan deferral or forbearance will work in your specific circumstances.
• It is also important to know that during deferment, depending on the type of loan borrowed, the borrower may still be responsible for paying interest that accrues.
• If a loan is in forbearance, the borrower will be responsible for paying accrued interest.
While deferring your student loans can be helpful when you’re undergoing a brief period of economic hardship, it may not be as helpful when it comes to managing loans long-term, since interest may continue to accrue and neither option changes your loan repayment terms. Keep reading to learn more options beyond deferment and forbearance.
Forgiveness Programs
One source of federal student loan debt help are loan forgiveness programs. These programs essentially forgive a remaining portion of federal student loan debt after you meet certain requirements. That means you don’t have to pay it; you may also hear this referred to as loan cancellation or discharge.
Here are specifics about student loan forgiveness:
• One of the most well-known loan forgiveness programs is the Public Service Loan Forgiveness program. This program offers federal student loan forgiveness for some people working full-time in qualifying public interest fields for 10 or more years.
Public Service Loan Forgiveness, also known as “PSLF,” offers federal student loan forgiveness for certain public servants (teachers, government workers, and some health professionals) and non-profit employees who qualify after 120 on-time qualifying payments.
Unfortunately, PSLF isn’t available to everyone. To qualify for Public Service Loan Forgiveness, you must work for a qualifying employer. Generally, government organizations and certain non-profits will be considered qualifying employers for the purpose of PSLF, but to be sure that your job counts for the PSLF program, you can submit a PSLF employment certification form to verify your employer’s eligibility for the program.
• If you have a disability, you may qualify for student loan forgiveness.
• If your school closed or misled you, your loan(s) may be discharged.
• If you have declared bankruptcy, your debt may be canceled.
💡 Quick Tip: If you have student loans with variable rates, you may want to consider refinancing to lock in a fixed rate before rates rise. But if you’re willing to take a risk to potentially save on interest — and will be able to pay off your student loans quickly — you might consider a variable rate.
Options for Private Student Loan Borrowers
What you’ve just read covers how to get help with federal student loans. But what if you have private student loans? (Private loans are also an option for refinancing federal loans, but if you do so, be aware that you forfeit federal protections, such as forbearance, and if you refinance for an extended term, you may pay more in interest over the life of the loan.)
If your private student loans are proving challenging to pay, here are some ways you might move forward:
• You could see whether refinancing your private loans with a different private loan can secure a more affordable payment.
• See if your employer offers an assistance program. Some will match repayments of student loans up to a certain amount.
• Retool your budget. The debt avalanche or debt snowball method might help you reframe your income and spending to help you get on top of your student loans.
• Seek credit counseling. Learn more about that below.
Credit Counseling
If you are feeling overwhelmed or are in a quandary about how to proceed with your student loan debt, consulting with a nonprofit credit counselor could be a good idea. You can gain the expertise and insights of someone who specializes in this terrain and hear ideas for how you might handle the situation. One well-regarded example of such an agency is the National Foundation for Credit Counseling, or NFCC.
Here’s how credit counseling can help when you’re in this stressful situation:
• A counselor can review your student loan debt and finances and develop a plan which you then manage on your own.
• Another option may be to have the counselor join you on a phone call with the issuer of your student loans to discuss options.
Having a trusted professional in your corner can be a key source of support when you face challenges with your student loan debt.
Avoid Student Loan Scams
Here’s a sad fact: Yes, there are scammers out there, looking to take advantage of people who have student loan debt. They typically offer deals to help you get out of debt but wind up cheating you. Getting involved with these people can make a difficult situation even worse, so be cautious.
The two main kinds of scams to know about are as follows:
• Student loan consolidation scams: In this ploy, a company promises to consolidate your federal loans. They charge you an upfront fee (never pay upfront fees, by the way) and then don’t do anything on your behalf. If you want to consolidate your federal student loans, you can do so for free at StudentLoans.gov.
• Student loan debt relief scams: Companies that advertise or contact you, saying they can reduce or eliminate your debt, may be part of a scam. Above, you’ve read about the available options for managing your debt. There are no magic solutions to making the amount you owe vanish, so don’t be fooled by these promises.
How to spot these scams:
• As noted, promises of making debt disappear to help with student loans are likely bogus.
• Those that give you an urgent deadline to apply in order to eliminate debt are probably also fraudulent.
• Requesting an upfront fee to apply for relief via the Department of Education is a signal that you are dealing with a scammer.
• A company that says they are affiliated with the Department of Education but isn’t listed at StudentLoans.gov is one to avoid.
• A business that says they need your FSA ID could well be a scammer.
Recommended: Student Loan Help Center
Student Loan Refinancing
As mentioned briefly above, another option for help with student loans may be refinancing them. For some borrowers, refinancing student loans could help lower monthly payments. However, if you refinance federal loans with private ones, keep in mind that you’ll forfeit federal protections and may, with an extended term, pay more interest over the life of the loan.
When you refinance your loans, a new private lender pays off your current federal and private student loans and offers you a new loan. The goal is to secure a better interest rate or better repayment terms, which can help you take control of your student loan debt. It’s one of several options you have available to get through what can be a challenging moment in your life.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
SoFi Student Loan Refinance If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
“Mortgagor” is just another word for someone who is borrowing money from a mortgage lender (the “mortgagee”) to purchase real estate. It’s not every day that you see the term “mortgagor” and it doesn’t roll off the tongue easily. You might even think perhaps it’s misspelled. But when it comes to financial matters, half the battle is understanding the jargon. In this case, the good news is that even if you have never heard of a mortgagor, it’s just another word for being the borrower on a home loan.
The Function of a Mortgagor
The mortgage universe can be a bit complex and it’s helpful to understand the basics of mortgages. So let’s take a closer look at the mortgagor’s role. The mortgagor makes monthly payments to the mortgagee as specified in the loan agreement. The terms of a mortgage can vary widely. For example, depending on the applicant’s credit history, the interest rate may be higher or lower than the average.
A mortgagor may choose from different types of mortgage loans. Some loans have a fixed interest rate and a term of 30 years, though many lenders offer loan lengths of 20, 15, or 10 years. A fixed-rate mortgage has an interest rate that remains the same during the life of the loan. A variable-rate mortgage is one in which the interest rate moves up and down with the market.
The bottom line: Mortgagors must pay back the loan in a timely fashion. If not, mortgagees can force foreclosure of the home or other real estate — the collateral for the loan. 💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you through the process.
How a Mortgagor Gets a Mortgage Loan
A mortgagor applies to a mortgagee for a mortgage. Conventional mortgage loans are originated by private lenders like banks, credit unions, and mortgage companies. Certain private lenders also originate FHA, VA, and USDA loans; those loans are insured by the Federal Housing Administration, Department of Veterans Affairs, and U.S. Department of Agriculture. Government-backed loans are often easier to qualify for and may have more lenient terms and lower interest rates.
No matter what kind of mortgage loan you seek, expect to jump through some hoops and produce much documentation to prove you are creditworthy and have the means to pay back what you borrow. A prospective lender will do a hard credit inquiry into your credit scores and credit history. So it’s helpful to understand what makes up your credit scores. Important factors include your credit history, how long you’ve had your lines of credit open, your payment history, and debt-to-income ratio, which is the total amount of your monthly debt payments divided by your gross monthly income. If your debt-to-income ratio is high, that may be a no-go in the eyes of a lender, who may see you as tapped out with no real wiggle room to take on a mortgage.
To purchase a home, buyers often take on a mortgage loan for the price minus any money they put forth as a down payment. While you may be able to get an FHA loan with 3.5% down, or a VA loan with no down payment at all, the median down payment is around 13% of the value of the home.
Contractual Obligations of Mortgagors
A deal is a deal is a legally binding deal. Once the ink dries on that mortgage, you’re locked into your commitment to pay as you said you would. If you veer off course, you’re at risk of losing the home, as there is a lien on the real property as collateral for the loan. At the very least, late or missed payments will cause your credit score to dip, which could be problematic the next time you need to show your credit score, be it for a car loan or maybe even to a potential employer.
Equity of Redemption
If this phrase sounds important, it is. You’ll be thankful for it if you have gotten behind on your mortgage. Equity of redemption, also called right of redemption, will give you a chance to get caught up and keep your home before a foreclosure sale.
When you miss payments, the mortgagee can start the foreclosure process. The lender can take back the house and sell it at auction to pay off the debts. If this process has begun, you may be able to redeem the mortgage using equity of redemption. Understand that you’ll need to come up with the money to pay off the principal, interest, and expenses under equity of redemption. Realistically, if you’re in financial trouble, a funding source to pay off the loan is unlikely.
Some states have a law that gives mortgagors the right to redeem the home for a period of time after the foreclosure sale. With the statutory right of redemption, usually the borrower must pay the bid price, plus interest and fees, to the buyer of the property at the foreclosure sale.
Rights of Mortgagors
While it doesn’t have to be a battle royal, when it comes to mortgagee vs. mortgagor, the mortgagee holds the keys to the kingdom. The lender puts up the money, and if the borrower can’t make the mortgage payments, the lender has the right to take the house. That’s not to say you are without a few good things in your back pocket, like the aforementioned rights of redemption. You can also ask that your mortgage be transferred to a third party, but only if the mortgagee is not in possession of the property. 💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.
Mortgagors vs Mortgagees
To lessen any confusion, here’s a quick look at who does what.
Mortgagor
Mortgagee
Makes monthly payments
Receives payments
Meet all terms of the mortgage
Sets loan terms, including length of loan, payment due dates, and interest rate, and communicates them clearly
When the loan is paid in full, gets the deed
Can seize property if mortgagor stops paying
The Takeaway
Understanding the lingo can help you be more confident as you embark on your homebuying journey. Do your research, pull together your financial documents, find a home you love and soon you, too, could become a mortgagor.
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.
Photo credit: iStock/fizkes
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Mortgages Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
It’s hard to believe that Americans ever got by without plastic, but the credit card is less than 75 years old. There’s a good chance your grandparents could tell you about life in the days of nothing but cash or checks.
Today, about 84% of Americans have at least one credit card, which allows them to quickly and conveniently tap or swipe their way towards purchases. Unfortunately, those rectangles of plastic may make spending a little too easy: The average household has almost $8,000 in this kind of debt.
Here, you’ll learn just how the credit card came into being, as well as smart ways to manage your credit card usage more effectively.
The Origins of Credit
Here’s how the story of the first credit card goes: Businessman Frank McNamara was having dinner at a New York City restaurant in 1949 when he realized he forgot his wallet. Rather than dine and dash, he came clean and asked if he could sign for the meal and pay later.
Though some say this legendary dinner never happened, everyone agrees McNamara founded Diners Club, the world’s first multipurpose charge card, in 1950. McNamara sold Diners Club memberships to friends and acquaintances willing to pay $3 for the “sign now, pay later” privilege at participating restaurants and hotels.
Until that point, only individual stores extended credit to customers. If you couldn’t pay for, say, a dress or a new suit at the general store — and the owner knew you were good for the money — you could run up a tab and pay cash later. But the Diners Club card provided the benefit of credit at multiple locations instead of just one establishment. 💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.
Next Came the “Big Four” of Credit Cards
Of course, future entrepreneurs and banks wouldn’t let Diners Club monopolize the charge and credit market for long. Eventually, other cards came on the scene—most notably Visa, Mastercard, American Express, and Discover.
• Visa: In 1958, Bank of America issued the BankAmericard — the first true credit card — to customers in California. While the original Diners Club card required payment in full at the end of each month, BankAmericard users could pay off purchases over time. In 1976, BankAmericard became Visa.
• Mastercard: BankAmericard got a run for its money when a group of banks joined forces in 1966 to create the Interbank Card Association (ICA). In 1969, ICA created Master Charge: The Interbank Card, which became Mastercard in 1979.
• American Express: The American Express Company has been around since 1850, but it didn’t issue its first charge card until 1958. Like Diners Club, the American Express card had to be paid in full each month. That changed in 1987 with the introduction of the Optima card, the first true credit card by American Express. (Fun fact: Elvis Presley was one of the earliest American Express card members.)
• Discover: Discover is the newest major credit card network on the scene. Sears launched the Discover card in 1986, distinguishing it from the pack by charging no annual fees and offering higher credit limits than other cards at the time.
Discover was also the innovator of cash rewards on credit card purchases—back in 1986. At that time, Discover cardholders could earn rewards of up to 1% cash back on all purchases. Incidentally, Discover Financial Services purchased Diners Club International in 2008.
How Credit Cards Have Changed Over Time
A lot has changed since McNamara’s legendary dinner. Take a look at some of the biggest shifts in the credit industry:
The Ubiquity of Credit
In the early decades, credit was curbed by restrictive interstate banking laws. But credit’s big breakthrough came in 1978, when the Supreme Court ruled to allow nationally chartered banks to charge out-of-state customers the interest rate set in the bank’s home state.
Credit expanded as a result, and today, the average American credit card holder has nearly four cards.
The Evolution of Fees
When Diners Club began, it made money by charging stores a 7% fee on all transactions. Today, credit card companies charge interest on debt, too, so they make money when you don’t pay your bill in full. This is what’s typically known as high-interest debt. How high? At the end of 2023, the average credit card interest rate was reported as 24.59%.
Also, Diners Club used to charge nominal membership fees, but by the 1980s, many credit card companies eliminated annual fees to stay competitive.
The Advent of Rewards
The ’80s also brought tangible rewards for using credit cards instead of cash. Discover pioneered cash rewards, allowing cardholders to get a percentage back on purchases charged. And in 1987, Citibank made a deal with American Airlines to give consumers reward points to use for future flights.
Today, consumers continue to use credit card rewards programs to earn cash or points for future purchases, including travel. In fact, more than 87% of credit card users have rewards programs associated with their cards.
How to Control Your Credit
Credit can be convenient and a real asset when you want to buy something you don’t have enough cash to pay for outright. It’s a powerful tool, and one that must be managed wisely. In the summer of 2023, credit card balances in America hit a new milestone, topping a total of $1 trillion. That likely means many people are carrying a significant amount of debt. To avoid having your balances soar too high, consider these ways to take control of your credit.
Build Your Credit History Wisely
It might sound enticing to pay for everything in cash (and thus stay out of debt), but most of us don’t have the cash flow to pay for college, buy a car, and purchase a home outright. Besides, even if you do have the cash to buy everything you need right now, when the day comes to apply for a loan, you’ll need a solid credit history to qualify.
If you’ve never had a single credit card or loan, your credit history is minimal, which means you pose a higher risk to lenders. In that way it pays to borrow, as long as you do so responsibly. That means spending less than you earn and paying your bills on time, every time. Whenever possible, pay off your credit card in full every month.
Consider Prefinancing
Of course, credit cards aren’t the only way to pay for purchases and build a strong debt payment history. Prefinancing (getting access to a sum of money in advance of a purchase), such as taking out a personal loan, is another option. When you apply for a loan, you’re requesting a specific amount of money from a lender and agreeing to repay that loan over a predetermined period of time.
How credit cards work is a different process. When you pay on credit, the credit card network (e.g., Visa) pays the merchant (e.g., Home Depot) for your purchases, and you pay the network back for your purchases each month. If you don’t pay your balance in full, you’ll be charged interest on future payments.
Between the two options, prefinancing may offer the benefit of lower interest rates and shorter loan terms, helping you get out of debt quicker. After all, if you don’t have a system in place to pay off purchases in a reasonable time frame, credit card debt can haunt you for a long time.
Think about it: If you’ve racked up $15,000 in credit card debt at an interest rate of 20%, and make a payment of $300 each month, it will take you 109 months (9+ years) to pay off your debt, including $17,635.48 in interest, by the way. (You can use a credit card interest calculator to see how your own debt stacks up.)
Understand Your Credit Score
Whenever you borrow money via a personal loan or use your credit card, your lenders and creditors send details of those transactions to three major national credit bureaus (Equifax®, Experian®, and TransUnion®). That information is then used to assess your creditworthiness, which is expressed as a three-digit credit score that represents the risk you pose to lenders.
The higher your credit score, the less risky you are in their eyes. FICO® scores are the ones used most often in lending decisions in the United States, with scores typically ranging from 300 (poor) to 850 (exceptional).
Your credit score comprises five categories, and each one has an impact:
• Payment history: Late or missed payments drag down your score.
• Amounts owed: High balances can hurt you; maxing out your credit cards is even more damaging.
• Length of credit history: A long history can increase your score.
• Credit mix in use: A healthy mix of credit cards, student loans, a mortgage loan, etc., can boost your score.
• New credit: Opening several credit accounts in a short period of time can damage your score.
💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.
Build Your Credit Score
If your credit score isn’t where you want it to be, there’s good news: Scores aren’t set in stone. Try these tips to build yours:
Getting out of Credit Card Debt With a Personal Loan
Sometimes the problem is bigger than a low credit score. Unfortunately, some people get so deep into debt that it’s hard to find a way out on their own. One option: A personal loan to pay off credit card debt. This kind of loan usually allows you to consolidate high-interest credit card debt into one lower-interest loan with a fixed monthly payment.
Balance-transfer credit cards are another potential avenue to get out from under debt. Keep in mind, though, that these likely charge balance transfer fees, and your interest rate will be considerable after the promotional period. On the other hand, if you shop around, you may be able to find a personal loan that doesn’t charge origination or other fees.
You might also benefit from free or low-cost financial counseling from a nonprofit organization, such as the National Foundation for Credit Counseling (NFCC).
The Takeaway
Clearly, Americans have become accustomed to and perhaps even reliant on credit cards since they were developed almost 75 years ago. When managed effectively, credit cards are valuable tools to help you pay for the things you need and to sustain the lifestyle you want.
If, however, you feel weighed down by credit card debt, start taking steps to control your credit, rather than letting it control you. Consider your options, such as balance transfer credit cards or using a personal loan, to help you pay off your balance.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
SoFi Student Loan Refinance If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
When individual mortgages are originated by lenders like banks or credit unions, they may bundle groups of these mortgages together into financial vehicles called mortgage-backed securities (MBS) that are then sold to investors on a secondary market.
This allows investors to gain exposure and returns from the mortgage market, while the lenders gain immediate capital to issue new mortgages.
However, if a mortgage in an MBS bundle defaults or contains errors, there is a “repurchase risk.” This means the entity that assembled and sold the MBS is obligated to buy back any non-performing or defective mortgage loans. This ensures their bundle retains its credit rating and market value.
If too many mortgages default, the MBS can lose significant value. As a result, lenders aim to include reliable mortgages in their securities and have technology to assess credit risk, detect fraud, and monitor performance — in order to avoid forced buybacks or losses for investors that diminish market confidence. In Q1 of 2023, there were $459 million in repurchases on about $68 billion in Fannie Mae loan-acquisition volume, or a 68 basis-point repurchase rate.
Benefits of technology for repurchase risk
Emerging technologies are proving essential to reducing repurchase risk and improving confidence in mortgages sold on secondary markets, enhancing transparency and security of loan data transfer to minimize errors.
For example, automated underwriting powered by artificial intelligence (AI) and machine learning allows lenders to more accurately assess risk and detect potential fraud during the application process, leading to higher-quality loans less likely to default.
Lenders are also utilizing predictive analytics on borrower behavior to identify early signs of trouble and take preventive action through improved loan monitoring systems.
With automated tracking enabling quicker interventions as needed, these technological capabilities help drive down default rates, ensure smooth payments and significantly mitigate repurchase risk. By leveraging such innovations, lenders can greatly strengthen investor trust in bundled mortgage products.
Specific types of technologies to reduce risk
Cutting-edge data technologies are invaluable for mitigating repurchase risk across sectors, especially in mortgages. For instance, certain firms now employ automated direct-source data connections to validate applicant details in real-time, confirming income, employment, assets and other information at the moment of origination. This prevents falsities upfront.
Additionally, enhanced data access enables lenders to monitor loan performance factors on an ongoing basis. Via API connections, loan data is streamed into systems allowing staff to catch early warning signs of borrower distress, like missed payments on other credit accounts. This data empowers lenders to take timely preventive and corrective actions with struggling borrower before complete default.
Between advanced application fraud checks and early intervention on emerging trouble signs, these data capabilities attack repurchase risk from both sides, further safeguarding mortgages for downstream investors.
Benefits to lenders and consumers
Employing such technological safeguards carries major advantages across mortgage lending stakeholders. With reduced defaults and minimized repurchase requests, lenders can reap higher profits on sold mortgages while strengthening investor trust in associated securities. This helps attract ongoing investment capital into the housing sector.
Consumers also benefit as improved loan quality and lower perceived default risk opens lending access, allowing originators to offer more borrowers mortgage financing, often at better interest rates.
By cutting risk through data and automation, these innovations allow for mortgage market growth, fueling a win-win for both lenders and everyday borrowers seeking to purchase homes. The enhanced market stability and consumer access further establishes technology’s power to drive positive change in lending.
Technology is transforming how mortgages are originated, bundled and sold on secondary markets to mitigate repurchase risk and improve stability. Through automated underwriting, direct source data verifications, and API-driven performance monitoring, lenders can significantly reduce defaults and errors in loan pools.
With lower repurchase risk, lenders enjoy greater revenue potential and investor confidence in the mortgage instruments they bring to market. Further boosted by early warning systems that enable targeted borrower interventions, these capabilities don’t just move risk off lender books, but actively prevent it at scale.
The results are profitable loan growth and expanded consumer access. Government agencies like Fannie Mae and Freddie Mac both have integrated these capabilities into the loan origination process to confirm the reliability of data from day one through closing and the eventual sale of the loan.
While regulations and diligent processes remain essential, innovations in data and analytics provide the infrastructure to continually improve mortgage quality over time. As adoption accelerates, technology systems will become the indispensable foundation upholding housing market growth for generations to come.
John Hardesty is general manager of mortgage at Argyle, the leading platform for consumer-permissioned payroll connectivity.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
A goodwill letter is a written correspondence that asks creditors to remove negative remarks from your credit reports.
Key points:
A goodwill letter is more likely to work on smaller negative items, such as late or missed payments.
The creditor has no obligation to honor or even respond to a goodwill letter.
Write a goodwill letter as you would for any business-related correspondence—keep it professional, clear and concise.
Take the necessary steps to avoid incurring negative items in the future.
Negative items, such as late or missed payments, can have a considerable effect on your credit score and make it harder for you to secure loans in the future. Luckily, if your late payments are a one-time thing and you have an overall positive relationship with your lender, you may be able to send a goodwill letter to have these negative items removed.
Read on to learn more about goodwill letters and how you can use them when taking control of your credit.
What is a goodwill letter?
A goodwill letter is a request to creditors to remove negative remarks from your credit reports. As the name “goodwill” suggests, this request puts it on the creditor to make a good-faith effort to cooperate and work with a client or customer, and to establish a good business reputation with its clients. A creditor might be willing to take such action if you have good history with the individual creditor and have demonstrated effort on your part to handle credit and finances more responsibly.
Creditors are never obligated to remove accurate negative items simply because you ask. And in some cases, creditors may not be able to remove the items due to internal policies or agreements with the credit bureaus. Nevertheless, making the request only takes a bit of your time, so it might be worth a try.
When should you use a goodwill letter?
It’s best to send a goodwill letter when you have a logical reason for missing a payment. Potential reasons for sending a goodwill letter include:
You experienced an unforeseen financial hardship that temporarily prevented you from paying your bills.
You or a loved one had a medical emergency.
You recently changed banks and forgot a payment during the switch.
You moved locations, but they didn’t send the bill to your new address.
You were under the impression that you set up automatic payments, but there was a technical difficulty.
Whatever your reason for missing the payment, be sure to communicate to the creditor that you’re committed to getting your credit back on track.
What can goodwill letters remove?
Goodwill letters are more likely to work for smaller negative items, such as late or missed payments. That’s because many creditors have agreements with credit bureaus that they will not negotiate with individuals to have repossessions, collection accounts or charge-offs removed in exchange for payment.
While you’re free to send a goodwill letter any time, they are—generally—most effective when you want to get a mark related to a one-time negative issue removed.
How long will it take to get a response?
A goodwill letter is an unofficial letter sent to a creditor. As such, there’s no timeline requirement or even an obligation on the creditor to respond to the letter. How long the letter takes to generate a response—or whether any response is generated—varies.
A goodwill letter is not an official credit dispute letter. When someone finds an inaccurate item on their credit report, they can send a credit dispute or verification letter to the credit bureau. This prompts the credit bureau to launch an investigation, which comes with specific timelines that must be followed by the credit bureau and any creditor that is asked to provide documentation for the negative item.
Do goodwill letters work?
While there is never any guarantee that a goodwill letter will be successful, they have the best chance of working when the borrower and the lender have a good relationship. If you’re already in collections or have a long history of making late payments, you might not have good enough standing to successfully make the request.
How to write a goodwill letter
Write a goodwill letter as you would any business-related correspondence. Type and print it, and keep it professional, clear and concise.
While you can provide details about the reasons for a lapse in payment or another negative factor, a goodwill letter should not focus on the emotional aspects. The goal should be to show the creditor that the issue was not indicative of how you normally handle credit. You may also draft the letter in a way that shows that you have substantially improved how you handle credit.
This helps the creditor see you as a more valuable client, which can encourage them to do a goodwill favor for you. The goal of such a letter should not be to make the creditor feel sorry for you.
When writing your letter, include details that can help the creditor identify your account and the negative item in question. Then, provide a short description of why you think the creditor should remove the negative mark. You should include:
Your account number
The date and type of issue that occurred
Information that identifies the negative mark
Information about how long you have had a relationship with the creditor
Information that shows this is not habitual behavior for you
Sincere regret that this occurred
A specific call to action that explains what you are asking of the creditor
Example of a goodwill letter
If you’re unsure how to write a goodwill letter, check out this example to get started.
Re: Account No. [Account number]
Sally Joe
1199 La Playa Street
San Diego, CA 91932
To Whom It May Concern:
I’m writing this letter to express my gratitude as a longtime customer of California Bank and to discuss a concern regarding my account. Specifically, I would like to discuss an item posted to my credit report regarding this account and request that it be revised.
My account with California Bank began on 2/10/2013. Since that time, I have enjoyed excellent customer service and benefits and have been happy with California Bank. I have also been a customer in good standing, paying my account in a timely manner while qualifying for loyalty programs.
However, in January, I was in a major car accident and spent a week in the hospital. This led to a temporary decrease in my income and an influx of medical bills. While I was able to bounce back financially and now am continuing to pay all my debts as owed and in a timely manner, the first month after my injury was financially difficult, and this is when I missed that single payment.
I wish I could have continued with normal payments during that time, and I regret that I wasn’t able to do so. Following that personal emergency, I’m working hard to repair any damage done to my credit and personal financial life, and I’m reaching out to you for support in that effort.
I’m asking that California Bank give me a second chance at a fully positive credit history with your organization by removing the late payment mark from my credit report with all three credit bureaus. Please let me know if there is anything else I can provide to support you as you consider my request. Thank you.
Sincerely,
Sally Joe
Goodwill letter sample + template
How to avoid incurring negative items in the future
As mentioned above, goodwill letters are most likely to work for one-off occurrences. So, if your goodwill letter is successful and a creditor agrees to remove a negative remark from your credit report, it’s important that you take the following precautions to avoid incurring negative items in the future:
Stay organized. Organizing your finances can help you remember to pay them on time.
Pay your bills automatically. If you frequently forget to make payments, set up automatic transfers to stay on top of your bills.
Update your contact information. If any personal information changes, like your address, be sure to update it on your statement.
Have an emergency fund. Building an emergency fund will hopefully allow you to keep making payments, even in the event of an unplanned expense.
If you’re looking to improve your credit, Lexington Law Firm may be able to help you. Lexington Law Firm’s credit repair services can help you address questionable negative items on your credit reports and to ensure that what is reported on your credit reports are accurate and substantiated pursuant to applicable laws.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Candace Begody
Associate Attorney
Candace Begody was an Associate Attorney at Lexington Law.
Ms. Begody was born and raised in Arizona. She earned her juris doctor from Arizona State University’s Sandra Day O’Connor College of Law and her master’s in business from the W.P. Carey School of Business, also at ASU. Ms. Begody joined Lexington Law in 2022. Prior to that, she worked in transactional and business law in the Phoenix area. Ms. Begody is licensed to practice law in Arizona and was located in the Phoenix office.
Of course, there’s a risk in handing over sensitive data. Identity theft is on the rise — the Federal Trade Commission received more than 1.1 million reports of it in 2022 alone. And the total number of data breaches has more than tripled, according to a 2022 report from Verizon.
The good news is, there are steps you can take to help protect your personal information. Some of these you’ll only need to do once, others are a habit that you’ll get the hang of with time.
Let’s take a closer look.
1. Use Strong Passwords
One of the most basic ways to protect yourself online is to use a unique password for each of your accounts — email, social media, mobile banking, you name it. Aim for passwords that are simple for you to remember but difficult for others to guess.
To create a strong password, keep the following tips in mind:
• Use a combination of upper- and lower-case letters, symbols, and numbers.
• Longer is usually better — aim for a password that’s at least six characters long.
• Never use personal information like your name, birthday, or email address.
• Random passwords are usually difficult for hackers to crack. Use a password generator if you need help.
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2. Turn On Two-Factor Authentication
Take advantage of two-factor authentication (2FA) when possible. 2FA involves using one authentication method plus your username and password. Examples of 2FA include sending a numerical code to your phone or email, using fingerprint ID, or identifying you via facial recognition.
Certain accounts add an extra layer of protection by using authenticator apps like Google Authenticator, Authy, or Microsoft Authenticator. Typically, these apps generate a verification passcode, which you’ll need to enter when you log in.
3. Always Use a Secure Connection
There were concerns in the not-so-distant past about using a public wifi network to get online, as it could make your information vulnerable to hackers. But today, connecting through a public network is usually considered safe. That’s because most websites protect data through encryption, a process that involves scrambling information so it can only be deciphered using a unique encryption key.
To make sure your connection is encrypted, look for either a lock symbol or “https” to the left of the URL in a browser.
4. Know the Signs of a Phishing Scam
Phishing is the oldest trick in the book. Unfortunately, it also happens to be fairly successful.
Phishing emails and text messages can take many different forms: a link to confirm financial information, an alert about suspicious activity or log-in attempts on one of your accounts, an invoice you don’t recognize, a coupon for a free prize.
One effective way to help prevent falling for these scams? Be cautious about emails that have an attachment or embedded link, and don’t click or download anything from a source you don’t recognize. Keep in mind that legitimate companies usually won’t send you a link to change or update your payment information. If you’re not sure whether a message is authentic, you can call the company directly to confirm.
5. Check Your Credit Report
Checking your credit report regularly is a simple way to help protect your identity and financial security. You can request a free credit report from each of the three major credit reporting agencies, Equifax, Experian, and Transunion, by visiting AnnualCreditReport.com . It will detail all the information about your financial history, including credit card debt, student loans, missed payments and more.
When you receive your credit report, make sure all of the information is accurate. If you notice anything that is incorrect, report it to the credit bureaus and dispute any inaccurate information.
💡 Quick Tip: Check your credit report at least once a year to ensure there are no errors that can damage your credit score.
6. Monitor Your Credit Card and Bank Accounts
Keeping tabs on your credit card and bank accounts doesn’t just help with tracking your spending. It’s also a good way to spot mysterious charges.
Sometimes, a scammer will start with a small, unassuming charge and then quickly escalate their spending when they feel that a person isn’t paying attention. Look for strange names and keep tabs on every purchase, no matter how small.
7. Make Social Media Profiles Private
At first glance, this might seem like an unnecessary step. After all, if someone has your social security and your address, what more do they need? But strengthening your privacy settings on your social media accounts can go a long way to protecting your data in the future. Hackers can use photos, comments, and more to learn about you, which could make it easier for them to break into your accounts.
8. Tap Into Online Tools for Help
As data security becomes more important, the government is getting involved. If you think, or know, that your identity has been stolen, you can visit Identity Theft , the Federal Trade Commission’s website dedicated to cyber security protection. There are resources to help you troubleshoot ongoing issues, create a plan to protect your identity, report identity theft, and more.
9. Update Software
Yes, updating apps, web browsers, and operating systems takes time and may temporarily disrupt your work. But the reward — protecting your data — is worth the few extra minutes. Many times, software updates include new features or improved security.
Set updates to happen automatically so you always have the latest and greatest version.
10. If Your Identity Has Been Stolen, Consider Placing a Credit Freeze on Your Files
By placing a credit freeze or security freeze on your files, you can prevent a potential hacker from opening a new account in your name. The freeze restricts access to your credit report, which makes it difficult for a cyber criminal to open up any accounts.
Freezing your credit does not affect your credit score. However, as long as the freeze is in place, you won’t be able to open any new accounts in your name. If you’re planning to rent an apartment, apply for a job, or buy insurance, you’ll likely need to temporarily lift the freeze for a certain amount of time or for a specific party.
Check with the credit reporting company in advance to find out the costs and lead times. The process is daily involved, as you’ll have to request a credit freeze with all three agencies.
Also, it’s worth mentioning that a credit freeze doesn’t prevent a hacker from adding charges to your existing accounts
11. Consider Placing a Fraud Alert on Your File If You Suspect Identity Theft
This is a much easier option than placing a full credit freeze, as it only requires creditors to confirm your identity instead of freezing all your credit in the future. It may be a good step to take if you are concerned that someone might have been able to access your personal data but lack proof
The Takeaway
Data breaches and identity theft happen, but by taking some simple precautions, you can help keep your personal information from falling into the wrong hands.
Cybercrime isn’t just disruptive, it can also be expensive. That’s why SoFi has partnered with Blink by Chubb to help protect your finances with cyber insurance. Apply in just minutes and get your quote.
SoFi helps you safeguard your digital life.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.