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Chapter 13 Bankruptcy, often known as a wage earner’s plan, provides a structured approach for individuals with a consistent income to manage and repay their debts. This guide aims to offer a thorough overview of Chapter 13 Bankruptcy, covering eligibility criteria, the process involved, and the various responsibilities it encompasses.

We’ll explore the essential elements of Chapter 13 Bankruptcy. These include its procedural framework, the duties imposed upon filers, and its effects on credit standings and asset holdings. Additionally, the roles of the bankruptcy trustee and your attorney are discussed, providing a comprehensive understanding of their involvement and support in this financial reorganization journey.

Qualifying for Chapter 13 Bankruptcy: Criteria and Guidelines

When considering Chapter 13 bankruptcy, it’s essential to understand who qualifies for this financial path. Chapter 13, named after its placement as the 13th chapter in the U.S. Bankruptcy Code (11 U.S. Code Title 11), is specifically designed to help individuals reorganize their debts.

Key Criteria for Qualification

Let’s break down the eligibility criteria in a straightforward manner to make it easier to determine whether Chapter 13 is the right option for you.

Regular Income: The Foundation of Eligibility

A fundamental requirement for Chapter 13 is having a regular income. This doesn’t just mean a traditional 9-to-5 job. Income can come from various sources like self-employment, seasonal work, social security, or even disability benefits. The key is having a steady flow of income that can support a repayment plan.

Debt Limit: Knowing Your Boundaries

There are specific debt limits set for Chapter 13 bankruptcy. As of the latest guidelines, your secured debts (like mortgages and car loans) must be less than $1,257,850, and your unsecured debts (like credit card debt and medical expenses) should be under $419,275. Staying within these limits is crucial for eligibility.

Credit Counseling: A Pre-filing Requirement

Before filing your bankruptcy petition for Chapter 13, you must complete credit counseling from an approved agency. This step, taken within 180 days before filing, is not just a formality. It’s a valuable exercise to understand your financial situation and explore alternatives to bankruptcy.

No Recent Bankruptcy Filings

If a bankruptcy judge dismissed your previous case within the past 180 days for failing to appear in court or comply with orders, you’re temporarily ineligible for Chapter 13. This also applies if you voluntarily dismissed your case after creditors sought court relief to recover property with liens. In these situations, Chapter 13 filing is not an option until the 180-day period has elapsed.

Are You Eligible?

Eligibility for Chapter 13 bankruptcy might seem complex at first glance, but breaking it down into these key areas – steady income, debt limits, mandatory credit counseling, and recent bankruptcy history – can clarify whether this path is an option for you.

If you meet these criteria, Chapter 13 could be a viable strategy for managing and reorganizing your debt. Remember, consulting with a bankruptcy attorney can provide personalized advice and help you make this financial decision with greater confidence and clarity.

How does Chapter 13 bankruptcy work?

Chapter 13 bankruptcy is often a practical solution for individuals grappling with financial challenges. It involves a well-defined process designed to help reorganize and manage debt effectively.

Understanding each step of this process is crucial, as it provides a clearer picture of what to expect and how to best prepare for the journey ahead. Let’s take a closer look at these steps to gain a comprehensive understanding of the Chapter 13 bankruptcy procedure.

Filing the Bankruptcy Petition

The journey begins with filing a bankruptcy petition in a federal bankruptcy court. This step officially starts your case and includes submitting various documents detailing your financial situation—like income, debts, assets, and a detailed list of expenses.

Completing Mandatory Credit Counseling

Before filing, you must complete credit counseling from an approved agency. This isn’t just a box to check; it’s a crucial step to ensure you’re fully aware of the implications of bankruptcy and alternative debt management strategies.

Developing a Repayment Plan

Within 14 days of filing, you’ll propose a repayment plan, detailing how you plan to pay off your debts over the next three to five years. Your income, living expenses, and debt types heavily influence this plan.

The Role of the Bankruptcy Trustee

Upon filing, the court appoints a bankruptcy trustee. This trustee evaluates your plan, oversees the repayment process, and distributes payments to your creditors. They act as a mediator between you and your creditors.

The 341 Meeting of Creditors

After filing, you’ll attend a ‘341 meeting’ with your trustee and creditors. This meeting allows creditors to ask questions about your financial situation and the proposed repayment plan.

Confirmation Hearing and Plan Approval

A bankruptcy judge will hold a confirmation hearing to approve your repayment plan. Creditors can object to the plan here, but if the judge finds the plan fair and compliant with bankruptcy laws, they will approve it.

Making Payments and Following the Plan

Once approved, you start making payments according to the plan. Consistent payments are crucial. Missing payments can lead to case dismissal or conversion to a Chapter 7 bankruptcy.

Discharge of Remaining Debts

After successfully completing the repayment plan, remaining qualifying debts are discharged. This means you’re no longer legally obligated to pay these debts, marking the completion of your Chapter 13 bankruptcy journey.

Your Responsibilities in a Chapter 13 Bankruptcy

Beginning April 1, 2019, when filing for Chapter 13, expect a certain number of requirements to maintain your eligibility. For example, you must:

  • File all required tax returns before your creditor’s meeting
  • Send all creditors a notice of your bankruptcy
  • Maintain child support and alimony payments during your plan
  • Make all payments to the trustee during your adjustment period
  • Make all payments for agreed upon secured loans, such as your house and cars
  • Meet new tax obligations and not incur significant new consumer debt
  • Provide the trustee with annual tax returns and information of changes in income
  • Get court approval for any new loan, or for buying, selling, or refinancing a home
  • No more than $419,275 in unsecured debts
  • No more than $1,257,850 in secured debts (including mortgages and car loans)

The Role of a Bankruptcy Trustee in Chapter 13 Proceedings

The trustee is a representative of the bankruptcy estate who works for the bankruptcy court and the federal government to review bankruptcy petitions and schedules.

This person generally handles most of the issues related to the processing and approval of bankruptcy cases. The trustee also acts as the disbursing agent for your payments and provides oversight on issues that might arise.

How Your Attorney Can Assist in Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, your bankruptcy lawyer generally analyzes all the particulars of your situation and prepares your estate, allowing you to keep as much of your property as possible. They will assemble all your information and data and handle your court paperwork and deadlines.

Your attorney will prepare your petitions, schedules, and statements for the bankruptcy filing. They will also draft your plan of reorganization and help you understand your duties. Attorneys will also meet with your creditors, attend hearings, and address issues with the trustee.

Additionally, attorneys will make necessary petitions and modifications if you need to change your Chapter 13 plan. They are now more liable for inaccuracies and other problems that could arise with your Chapter 13 case.

This means that many of the burdens of bankruptcy are taken off you and become the attorney’s responsibility.

Attorney’s fees vary from state to state, but expect to pay anywhere between $1,200 and $2,500. Given the level of responsibility they carry on your behalf, it’s well worth the investment.

The Impact of Chapter 13 Bankruptcy on Your Credit Score

Chapter 13 bankruptcy will be publicly listed on your credit report for a total of seven years, during which time your credit will be negatively affected.

However, your credit score will slowly increase as you establish a positive payment pattern during your adjustment period, and it will continue to increase as long you keep up with your payments.

You can also expect an increased difficulty in obtaining credit. If you do qualify for a credit card or loan, you’ll pay some of the highest interest rates on the market.

You’ll also only qualify for smaller credit amounts, so it will become essential to save up cash reserves to have on hand for any financial emergencies that pop up.

Protecting Your Assets: Exemptions in Chapter 13 Bankruptcy

Under Chapter 7, every state has a list of exemptions for things that don’t need to be sold to pay back creditors.

Usually, there is a monetary limit for each category of property you own, whether it’s your home, car, or household possessions. Under Chapter 7, your creditors have the right to liquidate assets not protected by this exemptions list.

However, in Chapter 13, instead of having those items liquidated, you must pay their full value to creditors as part of your adjustment plan. To fully understand how exemptions work in your situation and state, it’s helpful to talk to a lawyer.

Chapter 13 Bankruptcy for Self-Employed Individuals and Business Owners

If you are self-employed or operate your own business, you must file a monthly financial report or business operating statement with the trustee before the 15th day of each month.

You’ll also need to verify your income before filing for Chapter 13 bankruptcy. If you own your own business, it’s even more important for you to maintain thorough documentation of your financials both before and during Chapter 13 bankruptcy.

What to Do If You Can’t Meet Chapter 13 Bankruptcy Payments

If a situation arises under Chapter 13 in which you’re unable to make all your required monthly payments, you must show that it results from a serious income change or a necessary expense. Your lawyer must then file a moratorium with the bankruptcy court and creditors, which is subject to approval by the trustee.

In most Chapter 13 cases, you should be able to get approved for some type of catch-up plan, including lengthening your repayment term if you’re just suffering from a short-term financial setback.

For a long-term issue, you can apply for a modification. In the event of a severe hardship that makes it impossible for you to make your Chapter 13 payments, you can request a hardship discharge.

Another option is to convert your bankruptcy to a Chapter 7 and have your remaining eligible debts discharged. This is only possible if your new financial situation meets the income qualifications for Chapter 7 bankruptcy.

A final option is to dismiss your current Chapter 13 and file for a new one. Just make sure you request an automatic stay from the court to ensure creditors don’t resume their collection attempts as you pivot to a new bankruptcy plan.

Should I file for Chapter 13 bankruptcy?

There’s no right or wrong answer to this question. One of your first steps should be to undertake free credit counseling to see if you can figure out a manageable debt payment plan that works for your current situation. If not, you should then seek professional legal help.

It’s great to read up on the pros and cons of bankruptcy, but at the end of the day, so much depends on your personal situation. From your money to your state, there are countless small details that could influence what it means to take the best course of action.

Bottom Line

Chapter 13 Bankruptcy presents a structured pathway for individuals with regular income to reorganize and manage their debts effectively. Throughout this article, we’ve explored the intricacies of Chapter 13, from eligibility requirements to the responsibilities and roles of various parties involved. It’s clear that while this form of bankruptcy can offer a lifeline to those overwhelmed by debt, it also requires careful consideration and adherence to specific legal obligations.

Key takeaways include understanding the importance of meeting eligibility criteria, the vital role of a bankruptcy trustee, and the indispensable support an experienced attorney can provide. Additionally, recognizing how Chapter 13 Bankruptcy impacts one’s credit and the strategic planning required for managing exemptions are essential aspects of this process.

If you’re considering filing for Chapter 13 Bankruptcy, it’s crucial to consult with a qualified bankruptcy attorney who can provide personalized advice based on your unique financial situation. They can guide you through the process, help you understand your options, and work with you to develop a plan that aligns with your financial goals.

Remember, while Chapter 13 Bankruptcy can be a complex process, it also represents a proactive step towards regaining financial stability and moving towards a more secure financial future.

Source: crediful.com

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In times of market or economic uncertainty, investors may turn to alternative investments as a way to mitigate volatility and potentially improve risk-adjusted returns.

While alts come with risks of their own, these investments are not typically correlated with traditional stock and bond markets and can thus offer investors portfolio diversification.

In addition, alternative investments — an umbrella term for assets that fall outside standard stock, bond, and cash options — used to be accessible only to high net-worth and accredited investors. Now alts are available to a range of investors thanks to the emergence of new vehicles that include different types of alternative strategies and assets.

Key Points

•   Alternative investments are not generally correlated with traditional stock and bond markets, so they can help diversify a portfolio and mitigate risk.

•   Alternative investments may deliver higher returns when compared with conventional assets, but are also considered higher risk.

•   Some alternative investments, including some funds that invest in these assets, may provide passive income through dividends.

•   Alternative investments are typically less liquid and less transparent than conventional securities, so there can be limits on redemption, lack of data, and higher risk.

•   Alternative investments may be suitable for investors who have a higher risk tolerance, are looking for diversification, and understand the potential advantages and disadvantages of these investments.

Why Consider Alternative Investments?

Not only are alternative strategies more accessible to ordinary investors today, they offer several ways to add diversification to investors’ portfolios. Alternative investments come with risks of their own (see “Important Considerations” below), and investors need to weigh the potential upside of different alts with their disadvantages.

Unique Investment Options

For investors seeking diversification — or otherwise drawn to invest in a wider range of opportunities — the world of alts offers a number of options.

Alts include tangible assets like commodities, farmland, renewable energy, and real estate. Alternatives also include art and antiques, as well as other collectibles (e.g. antiquarian books, vinyl LPs, toys, comics, and more).

In addition, alternative investments can refer to strategies like investing in private equity, private credit, hedge funds, derivatives, and venture capital. These vehicles may deliver higher returns when compared with conventional assets, but they are typically considered higher risk, owing to their use of leverage and short strategies and other factors.

Diversification

Investors wondering why to invest in alternatives often focus on diversification. Why does diversification matter? As many investors saw in 2021-22, volatility in the equity markets can take a bite out of your portfolio, as can interest rate risk.

In order to mitigate those risks, adding alternatives to your asset allocation provides a literal alternative to conventional markets, because for the most part these assets don’t move in tandem with the stock or bond markets.

In a general sense, diversification is like taking the age-old advice of not putting all your eggs in one basket. An investor can’t avoid risk entirely, but diversifying their investments can help mitigate the risk that one asset class poses.

However, the challenge with alts is that there are no guarantees of how an alternative asset might perform. And because these assets are generally less liquid and not as highly regulated as most other securities, i.e. stocks, bonds, mutual funds, and exchange-traded funds (ETFs), there can be limits on redemption — and a limited understanding of real-time pricing.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, pre-IPO unicorns, venture capital, and more.

The Role of Alts in Your Portfolio

Taking all that into account, what could be the role of alts in your portfolio? In other words, why invest in alts? Of course, alternatives would only be part of your asset allocation. How much to put into alts would depend on your risk tolerance and overall goals. Here are some factors to consider.

Low Correlation With Stocks

As noted above, most alternative strategies are uncorrelated with conventional stock and bond markets. During periods of volatility or uncertainty in these markets, some investors may find alternative investments more appealing.

That doesn’t mean that alternatives will always outperform bonds or equities. Low correlation means that a particular asset class moves in a different direction than conventional markets. So, if the stock market drops, uncorrelated asset classes like commodities or real estate and investment properties are less likely to experience a downturn — which can help mitigate losses overall.

The challenge with alts is that some of these assets come with their own intrinsic forms of volatility (e.g. commodities, renewables, private equity, venture capital), and investors need to keep these risk factors in mind as well.

Tax Treatment of Alts

Generally speaking, investment gains are taxed according to capital gains tax rules. This isn’t always the case with alternative investments. It may be a good idea to consult with a tax professional because alts don’t necessarily lower your investment taxes, but they are taxed in different ways.

Important Considerations When Choosing Alternative Investments

Investing in alts requires careful thought because these assets aren’t traded or regulated the same way as more conventional securities.

Liquidity

Generally speaking, most alts are illiquid compared with conventional assets. This can make them hard to evaluate in terms of price and hard to trade. In addition to which, there can be limits on redemption, depending on the asset. Some alts only allow redemptions twice a year, or quarterly.

Lack of Data

Owing to the lack of regulation in some sectors, it can be difficult to obtain accurate price history and trading data for some alts. This also adds to the challenge of trading some of these assets.

Who Should Invest in Alts?

Although some alternatives can be highly risky and expensive, retail investors may want to consider alts because of the advantages these assets offer in terms of diversification and risk mitigation.

The investors who decide to invest in alts today may be drawn to the number of options available via mutual funds and ETFs, many of them offered by well-established asset managers. And in some cases, including alts in a portfolio may capture some of the desired advantages.

That said, investors need to do their due diligence to understand the potential pros and cons of these instruments.

The Takeaway

Alternative investments are on the radar of many investors today because these assets may offer some portfolio diversification, help to tamp down certain risks, and possibly improve risk-adjusted returns. In addition, the sheer scope and variety of these investments means investors can look for one (or more) that suits their investing style and financial goals.

That said, unlike more conventional investments, alts tend to be higher risk, more expensive, and subject to complex tax treatment. Thus it’s important to do your due diligence on any investment option in order to make the best purchasing decisions and reduce risk.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest in alts to take your portfolio beyond stocks and bonds.

Photo credit: iStock/Ridofranz


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.

Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor’s risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.

Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

SoFi Invest®
SoFi Invest refers to the two investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.

2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA(www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of SoFi Digital Assets, LLC, please visit SoFi.com/legal.

Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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

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Source: sofi.com

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Home buyers should be pleased with the continuing drop in mortgage interest rates this week. If they can find a home, they can lock in a mortgage interest rate of 6.60% this week, down from 6.66% last week. This is the lowest mortgage interest rate in eight months (May 2023 mortgage interest rates were 6.57%). The historical norm for mortgage interest rates since 1971 is 7.74%.

For a $400,000 home, the typical mortgage payment with a 20% down payment for a 6.6% mortgage interest rate would be $2,044. This is a monthly savings of $257 compared to when mortgage interest rates were at their recent high point in October 2023.

For potential home buyers, winter is often a time to set financial goals for the year ahead. If a home purchase is a financial goal on the horizon, this is the time to work on cleaning up finances and finding a mortgage broker and a REALTOR® to help with that pursuit. Home buyers, especially first-time buyers, can benefit from researching FHA, VA loans, and low down payment programs. These programs are often under home buyers’ radars and can put homeownership within reach.

Source: nar.realtor

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Last year was tough for potential home buyers: Prices and mortgage rates were high, while the number of homes available was low. But even if rates inch down and inventory climbs — trends many experts expect in 2024 — some nonhomeowners will be content to sit this one out. That’s because renting a home isn’t just a consolation prize, something you do only if you can’t buy. For many, it’s a deliberate choice.

Well over one-third (37%) of renters plan on renting forever, according to NerdWallet’s 2024 Home Buyer Report. For many, it’s a lifestyle choice: Three-quarters of Americans who rent their homes say renting suits their life better than owning right now.

Meanwhile, a smaller share has resigned themselves to renting after a discouraging run as a potential buyer: 1 in 20 Americans who began 2023 with plans to purchase canceled those plans because they changed their mind about buying a home, now or ever, according to the survey.

The decision to rent or buy is complex and goes beyond the financial aspects. Here are four considerations that may make renting not only acceptable but the right choice.

1. Upfront costs of homebuying are substantial

More than half (56%) of renters say they don’t think they’ll ever be able to afford homeownership, according to the NerdWallet survey. Indeed, average mortgage payments are 37% higher than the average rent in multifamily units, according to a recent analysis from CBRE Research, a commercial real estate services and investment firm.

And these monthly ownership costs are far from the only ones tipping the scales. Even in markets where rents and house payments are comparable, buying a house requires upfront costs that far exceed a security deposit. These upfront homebuying costs, including the down payment and closing costs, can easily run into the tens of thousands of dollars.

Saving for these costs can take years of sacrifice, setting aside money that could otherwise go toward retirement or other long-term financial goals — or fun stuff, such as travel. It boils down to what you value, and if your heart isn’t really in it, homeownership might not be worth those sacrifices for the time being.

2. You don’t want to feel tied down

Owning a home makes it more cumbersome to move when you receive a job offer or simply desire a change of scenery. If you’re uncertain of where you want to live long-term, it can be difficult (and costly) to commit to a mortgage. The 75% of renters who say renting suits their lifestyle better than owning would likely nod their heads to this.

There’s no hard-and-fast rule regarding the age at which you should “put down roots.” There’s really no rule at all. If you prefer the flexibility of shorter-term commitments or want to experience many locations before choosing a favorite, renting can give you that.

3. Homeownership requires more ongoing work

Generally, homeowners are advised to set aside 1% to 4% of their home’s value each year for ongoing maintenance costs. The maintenance and repairs of a rental home, on the other hand, are largely left up to the landlord. While the service quality may vary, it rarely comes at an additional cost to the renter. And this isn’t lost on those tenants: 55% of renters prefer renting to all of the expenses and effort of homeownership, according to the survey.

While DIY trends have grown significantly over the years — through popular culture on television and social media, and later through necessity during the early pandemic — not everyone wants to invest in the tools and time necessary to maintain their own home. And those homeowners who choose not to would otherwise have to do the work of hiring someone, another dreadful task.

4. You’re not convinced it’s a good investment

Well over half (59%) of renters don’t believe buying a home in the current market is a smart investment, according to the survey. Real estate investments, like most investments, don’t come with guaranteed returns. Even if you get a deal on a house and make improvements with the goal of selling it at a profit, things outside of your control (e.g., the economy, a pandemic, etc.) can have a significant impact on the outcome.

About one-third (34%) of renters are embarrassed to admit they rent instead of owning their home, but they don’t need to be. People who lease vehicles likely aren’t ashamed of their choice. Renting a home can be a perfectly logical decision, made after weighing the costs, benefits and how one option simply fits your life better.

Source: nerdwallet.com

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There are many steps in the homebuying process, not least of which is deciding what type of mortgage to use. Comparing two common mortgage categories — a loan backed by the Federal Housing Administration (FHA) vs a conventional loan — is a smart place to start. This may be especially true for first-time homebuyers, who often find it challenging to save a substantial amount of money for a down payment.

Understanding FHA Loans and Conventional Mortgages

Buying a home is often the largest investment of a lifetime. It’s important for borrowers to understand how the FHA loan vs conventional loan decision could impact their interest rate, loan terms, and minimum down payment. Eligibility requirements also vary between different types of home mortgages. Let’s examine how each loan type works, plus the factors to consider when deciding between an FHA vs a conventional loan.

💡 Quick Tip: SoFi’s Lock and Look + feature allows you to lock in a low mortgage financing rate for 90 days while you search for the perfect place to call home.

What Is an FHA Loan?

An FHA loan is a government-backed loan that’s issued by a lender, such as a bank or credit union, but insured by the Federal Housing Authority (FHA). FHA loans offer low down payment options, as well as flexible income and credit guidelines. For a first-time homebuyer, it may be easier to secure an FHA loan than a conventional mortgage, although it’s always worth exploring both options.

What Is a Conventional Mortgage?

Conventional loans are not insured by the government. They typically have stricter borrower requirements than FHA loans but can cost less over the life of the loan.

Basic Eligibility and Application Process for Each

There are some key differences in eligibility requirements between these two popular mortgage types. Eligibility for FHA and conventional loans is based in part on financial factors like credit score and debt-to-income ratio (DTI). Additionally, FHA loans can only be used for a primary residence and require borrowers to occupy the property within 60 days. Buyers can typically have only one FHA loan at a time, unless they meet specific exceptions.

Applying for either type of home loan involves many of the same steps of the mortgage preapproval process. With either mortgage type, lenders may ask borrowers to submit information on the property they’re purchasing and documentation of income, assets, debts, and employment.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Recommended: The Mortgage Loan Process Explained in 9 Steps

FHA vs. Conventional Loans: Key Distinctions

In a head-to-head FHA vs conventional loan comparison, it’s worth noting some key distinctions. The minimum down payment, credit requirements, insurance, loan limit, and property eligibility varies between each loan type. Here’s how it looks:

Down Payment Requirements and Differences

Pitting an conventional loan vs. an FHA loan will show you how much money you need to put down on a house. (To get a good sense of how much home you are prepared to buy, use a home affordability calculator.) The minimum down payment for FHA loans is 3.5% for borrowers with at least a 580 credit score and 10% for borrowers with credit scores between 500-579. Meanwhile, conventional loans can offer down payments as low as 3% for a fixed-rate loan, or 5% for an adjustable-rate mortgage.

Credit Score Requirements and Impact on Approval

Lenders will look at your credit score with either loan type. Borrowers can secure an FHA loan with a credit score of 500, though as noted above, this requires a down payment of 10% versus just 3.5% with a credit score of 580 or higher. Conventional loans have stricter credit requirements — borrowers will typically need a credit score of at least 620 to qualify.

Mortgage Insurance: PMI vs. MIP

Mortgage insurance premiums (MIPs) are required with an FHA loan. This includes an upfront payment equivalent to 1.75% of the loan and an annual premium that’s spread across monthly mortgage payments. MIP runs for the full loan term or for 11 years if a borrower puts 10% or more down. With a conventional loan, buyers who put less than 20% down will need private mortgage insurance (PMI), which is paid monthly with the mortgage payment.

Loan Limits and Property Eligibility

The amount you can borrow and the condition and intended use of the property are key factors when deciding between an FHA vs. conventional loan. FHA loan limits are set annually by the U.S. Department of Housing and Urban Development (HUD). For 2024, the limit for single-family residences is $498,257 for low-cost areas and $1,149,825 for high-cost areas. The limits increase for two-, three-, and four-unit properties. In 2024, the conventional loan limit for single-family properties is $766,550 in low-cost areas and $1,149,825 in high-cost areas.

Property eligibility also differs by loan type. FHA loans involve stricter appraisals that consider safety and building codes, not just the home’s value. Additionally, conventional loans can be used for a second home while FHA loans are limited to primary residences.

Interest Rate Variations

Interest rates are influenced by several factors, including a borrower’s income, credit score, down payment amount, and the overall state of the economy. Because FHA loans are backed by the government, they generally have more competitive interest rates compared to conventional mortgages.

Benefits and Drawbacks of FHA Loans

Lower Down Payment but with Mortgage Insurance Premium

For borrowers with credit scores of 580 or higher, the ability to put as little as 3.5% down is a key reason for choosing an FHA loan. But FHA borrowers pay MIP, regardless of the down payment amount.

Recommended: Private Mortgage Insurance (PMI) versus Mortgage Insurance Premium (MIP)

Flexible Credit Requirements

In terms of credit score, FHA loans are easier to qualify for than conventional loans. FHA loans require a credit score of 580 to put 3.5% down or 500 to put 10% down.

Property Eligibility and Restrictions

FHA loans are intended for primary residences, so they can’t be used for vacation homes or investment properties. The appraisal process for FHA loans is also more strict than for conventional loans. The FHA appraisal assesses the property value and the home condition to ensure it meets minimum property standards set by HUD. These extensive standards cover design, as well as building materials such as insulation.

Interest Rate Variability

FHA loans usually have lower interest rates since lenders incur less risk with government-backed loans. Interest rates vary by lender, so it’s worth shopping around to compare options, whether you are considering an FHA or a conventional mortgage.

Advantages and Disadvantages of Conventional Mortgages

Opting for a conventional loan vs FHA loan comes with a mix of potential benefits and drawbacks.

Higher Down Payment but No Upfront Mortgage Insurance

Though borrowers could qualify for a conventional loan with a 3% down payment, a higher down payment is more common. The average down payment on a house is 13%, although younger borrowers and first-time buyers often put down less than this. Borrowers can choose to put 20% down on a conventional loan to avoid the cost of private mortgage insurance.

Stricter Credit Score Requirements

The minimum credit score to qualify for a conventional loan is 620, though this can vary by lender.

Property Eligibility and Restrictions

Conventional loans don’t have the same occupancy requirements as FHA Loans. This allows borrowers to purchase a variety of property types, including primary residences, vacation homes, and investment properties.

Interest Rate Stability and Flexibility

There are two types of conventional loans: fixed-rate and adjustable-rate. The former has the same interest rate for the loan term, offering predictability and stability. Adjustable-rate mortgages, on the other hand, tend to have a lower introductory rate for several years before the rate fluctuates based on market conditions. This can provide upfront savings at the onset of the mortgage.

FHA Loan vs. Conventional: Costs Comparison

When comparing FHA loans vs conventional loans, it’s worth considering the monthly payment and overall cost over the life of the loan with each option. For home buyers with a good credit score, a conventional loan may be more attractive. That’s because conventional loan costs are more dependent on your credit score and down payment amount than FHA loan costs. And as a result, your monthly payments and PMI are lower when your credit score is higher. This is a key difference from how FHA loans work.

Upfront and Monthly Costs for Mortgage Insurance

FHA loans require paying MIP for 11 years or the life of the loan depending on the down payment amount. MIP also involves an upfront cost that’s equal to 1.75% of the loan amount. The ongoing cost of MIP is between 0.45% and 1.05% annually, divided across monthly payments.

With a conventional loan, borrowers pay PMI, which typically ranges from 0.5% to 2% of the total loan amount annually. The cost of PMI depends on the borrower’s credit score, loan-to-value (LTV) ratio, and other factors. Borrowers can stop paying PMI once the mortgage balance is at 78% of the home’s original value or current value following an appraisal. For borrowers with stronger credit, PMI with a conventional loan can cost less than MIP with an FHA loan

Interest Rates and Overall Loan Costs

Though FHA loans can offer more competitive rates and be less expensive in the short-term, borrowers with strong credit could save in the long-term with a conventional loan. Once borrowers get out of PMI on a conventional loan, the annual percentage rate (APR) — the annual cost of the loan — may be lower than an FHA loan.

Down Payment Impact on Immediate and Long-Term Finances

If you can afford to put 20% down on a conventional loan, you’ll avoid the upfront and ongoing cost of PMI. Putting more money down could translate to a lower interest rate, providing further savings on monthly payments and long-term finances.

Increasing your down payment on an FHA loan to 10% can reduce the duration of paying MIP to 11 years and potentially lower the interest rate. However, borrowers who can afford a higher down payment may save more with a conventional loan since PMI can be canceled sooner.

FHA vs. Conventional Loans: Eligibility and Qualification Criteria

Borrowers have to meet certain eligibility requirements to qualify for either an FHA or a conventional loan. Generally, FHA loans are easier to qualify for, but they have stricter property eligibility requirements than conventional loans.

Qualifying Credit Scores for FHA and Conventional Loans

To qualify for a conventional loan, borrowers typically need a credit score of 620 or higher. Meanwhile, borrowers could qualify for an FHA loan with a credit score of 500 if they put 10% down. Borrowers with a 580 credit score can put just 3.5% down.

Down Payment Requirements for Both Loan Types

The minimum down payment for a conventional loan is typically 3% if it’s a fixed-rate mortgage or 5% if it’s an adjustable-rate mortgage. However, the down payment requirement can vary based on a borrower’s financial situation, loan amount, and type of property. FHA loans require either a 3.5% or 10% down payment depending on a borrower’s credit score.

Property Eligibility and Loan Limits

FHA loans can only be used for primary residences, while conventional loans apply to a primary residence, vacation home, or investment property. For 2024, FHA loan limits for single-family homes are $498,257 (in low-cost areas of the U.S.) and $1,149,825 (in high-cost areas). Conventional loan limits for single-family properties are $766,550 in low-cost areas and $1,149,825 in high-cost areas. Buyers who want to purchase a property that exceeds these limits will need to consider a jumbo mortgage loan.

FHA Loan vs. Conventional: Which Is Right for You?

There’s no one-size-fits all solution for buying a house. When deciding between FHA vs conventional loans, the right choice depends on your finances, your long-term financial goals, and the property type you wish to purchase.

Factors Influencing the Choice

Your credit score and ability to make a down payment are key considerations when weighing conventional loan vs FHA loan. If you have a lower credit score or a higher debt-to-income (DTI) ratio, an FHA loan could be a better bet for its flexible credit requirements and more competitive interest rate. However, borrowers with strong credit could qualify for a conventional loan with a down payment of just 3%.

Long-Term Financial Considerations

FHA loans can be more affordable upfront due to lower interest rates and down payment requirements. But borrowers will be on the hook for paying mortgage insurance for the full loan term unless they put 10% down or refinance later on.

If you’re able to qualify for a conventional loan and put 20% down on a house, not having to pay private mortgage insurance can save money in the long run. Conventional loans also offer more flexible repayment terms, whereas FHA loans are either 15- or 30-year mortgages.

Flexibility in Property Choices

FHA loans require occupancy within 60 days and the property must be the borrower’s primary residence. These loans also have strict rules for property conditions. For instance, a manufactured home built prior to 1976 is not eligible for an FHA loan. On the other hand, conventional loans can be used for second homes and a greater range of property types.

💡 Quick Tip: If you refinance your mortgage and shorten your loan term, you could save a substantial amount in interest over the lifetime of the loan.

The Takeaway

Deciding between an FHA loan vs a conventional loan depends on your specific financial situation and the property type. An FHA loan could be a better option if you have a higher DTI ratio, lower credit score, or less money to put toward a down payment. Whereas a conventional loan could be a better fit if you have strong credit and can afford a larger down payment.

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

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What are the main differences between FHA and conventional mortgages?

FHA loans are insured by the Federal Housing Administration, whereas the lender assumes the risk for a conventional loan. For the borrower, an FHA mortgage typically has a lower credit-score requirement. It may also allow a lower down payment than some conventional loans.

Can I qualify for both an FHA loan and a conventional mortgage simultaneously?

It is possible to qualify for both an FHA loan and a conventional mortgage simultaneously. Note that lenders will look at your finances closely to ensure you can afford both loans.

How does property type affect the choice between FHA and conventional loans?

FHA loans are restricted to primary residences, while conventional loans can be used for second homes, such as investment properties or vacation homes. FHA loans also have stricter property condition requirements compared to conventional loans.

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*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.

+Lock and Look program: Terms and conditions apply. Applies to conventional purchase loans only. Rate will lock for 91 calendar days at the time of preapproval. An executed purchase contract is required within 60 days of your initial rate lock. If current market pricing improves by 0.25 percentage points or more from the original locked rate, you may request your loan officer to review your loan application to determine if you qualify for a one-time float down. SoFi reserves the right to change or terminate this offer at any time with or without notice to you.

¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.

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

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Source: sofi.com