Editors’ take: State Auto offers customers the opportunity to customize coverage options or choose from three insurance packages. State Auto could be a good option for people who want to combine personal, business and farm insurance. But if you like an online-centric experience, other insurers may be a better fit — State Auto only provides insurance quotes via an agent.

State Auto Insurance at a glance

Pros

• Range of coverage options
• Opportunity for rate discounts based on your driving
• Easy online claims process

Cons

• Limited discounts

What you need to know about State Auto

State Auto is owned by Liberty Mutual. It operates with a network of independent agents.

In addition to auto insurance, the company offers various insurance policies for individuals, businesses, farms and ranches.

Numerous auto insurance coverage options

State Auto offers standard car insurance coverages including liability, medical payments/personal injury protection, uninsured/underinsured motorist, comprehensive and collision coverage.

State Auto also offers three levels of coverage options, plus other features you can add to meet your unique needs and budget.

 Rate discounts based on driving

The State Auto Safety 360 telematics program allows drivers to reduce their auto insurance premiums by up to 50%.

Just by participating in the program and installing a telematics device on your windshield, you earn an initial 10% participation discount. If the device gives you a high score for safe driving habits, you can get up to a 50% discount total on your auto renewal premium.

Auto coverage offered by State Auto

State Auto offers three coverage level options, allowing you to customize coverage to meet your needs.

• Standard — The standard package offers the basic coverages like liability, medical payments, uninsured/underinsured motorists, comprehensive and collision.
• Protection Plus — The AutoXtended® Plus option provides all the basic coverages of the Standard plan. It also provides Accident Forgiveness & Minor Violations coverage. These features allow you to avoid a rate increase after your first fender bender or minor traffic violation — such as rolling through a stop sign — as long as you’ve been free of accidents and moving violations for 35 consecutive months. The Plus option also offers additional coverage like locksmith/key replacement and cellphone coverage.
• Premier — The AutoXtended® Premier option provides the highest level of coverage by adding policy enhancements and higher coverage amounts to the AutoXtended Plus plan.

Auto insurance discounts offered by State Auto Insurance

State Auto offers discounts for bundling multiple policies, installing an anti-theft device on your vehicle, having two or more cars on the same policy, taking an accident prevention or driver education course, paying your entire policy premium in advance, being a good student, and enrolling in the Safety 360 program.

While these discounts are helpful for customers, they’re not exactly unique. Many auto insurance companies offer discounts for bundling policies, installing anti-theft devices, insuring more than one car on a policy, taking a defensive driving course, being a student driver with good grades, and agreeing to allow your insurance company to track your mileage and driving behavior.

FAQs about State Auto insurance

Not sure if State Auto Insurance is right for you? Consider these alternatives.

Many other car insurance providers can offer competitive rates and discounts if you’re looking for an alternative to State Auto.

• Progressive offers coverage direct to consumers via phone or online. If you prefer a large insurance carrier with the potential for many discounts, Progressive could be a good option.
• Geico offers special auto insurance rates for members of many organizations, including alumni associations, federal organizations and professional organizations.

Many states in the U.S. require drivers to have a driver’s license and register their vehicles in the same state where they reside.

However, there are some exceptions.

Depending on your circumstances, you may have a legitimate reason for registering your car in a state other than the one you live in. For example, having vehicles in multiple states might make sense if you own a vacation home or are in the military.

• Can you register a car in a different state than your license?
• Which states don’t require your license to match your registration?
• How to register your vehicle as a non–U.S. resident
• Special situations for car registration
• How to register your car in a different state
• FAQs about nonresident car registration

Can you register a car in a different state than your license?

Many states don’t allow vehicle registration without a matching driver’s license. In fact, many states have laws requiring new residents to get a state driver’s license quickly — typically within 30 to 90 days. And states may also require you to present your license or other proof of residency when registering your vehicle in the state.

However, some states don’t require your license to match your registration, which means you may be able to register your car as nonresident in those states. Check out a list of the states that don’t require a matching license below.

Which states don’t require your license to match your registration?

Here are the handful of states don’t require your license to match your registration.

• California allows nonresidents to register a vehicle in the state if the car is based in California or primarily used on California highways.
• Colorado doesn’t require an in-state license to register a vehicle, although you need proof of Colorado insurance.
• Delaware doesn’t require an in-state license to register your vehicle, but instead, you must provide two documents proving your Delaware residency when registering your vehicle and it has to pass an inspection.
• Florida allows nonresidents to register vehicles in the state temporarily under certain circumstances. For example, if you’re temporarily employed in Florida, you can apply for a 90-day license plate. Nonresident Military members deployed in Florida can also purchase a Florida license plate and qualify for a fee exemption.
• Indiana doesn’t require an in-state license to register a vehicle, but you’ll need to show two documents with your name and an Indiana address.
• Kentucky doesn’t require an in-state license for vehicle registration, but you need a photo ID. Kentucky also requires proof of Kentucky car insurance unless you’re active-duty military stationed in Kentucky.
• Maine doesn’t require an in-state driver’s license. You must bring your out-of-state title and registration (if transferring from another state) and your Maine insurance card.
• Massachusetts only requires you to prove lawful presence in the U.S. to register a vehicle in the state. If you don’t have an in-state license, you can show an unexpired license from another state or country, a Social Security card or another document proving lawful presence in the country.
• New York allows nonresidents to register vehicles from out of state by mailing an application and the necessary documents to a New York DMV office.
• North Dakota allows nonresidents working in the state to obtain temporary vehicle registration. The temporary registration is valid for either six months or 12 months. You’re required to maintain current registration in your home state.
• South Dakota allows nonresidents to register vehicles in the state. You need your original out-of-state title, a copy of your driver’s license, Social Security number and a registration application.

You generally must show a current in-state driver’s license to register a vehicle in the remaining states.

How to register your vehicle as a non–U.S. resident

Some states allow non–U.S. residents to register vehicles. However, each state makes its own rules, so it’s a good idea to visit the state’s department of motor vehicles to review the requirements.

For example, you don’t need to provide a U.S. driver’s license to register a vehicle in Massachusetts — you just need to show proof of lawful U.S. presence.

If you don’t have a valid U.S. driver’s license, passport or birth certificate, you may be able to prove lawful presence in the U.S. with one of the following in some states:

• Permanent Resident Card issued by the Department of Homeland Security or U.S. Citizenship and Immigration Services
• Temporary I-551 stamp in a Foreign Passport
• Employment Authorization Document issued by the DHS

Special situations for car registration

Many states recognize that special situations might require people to have a vehicle registered in a state other than that of their legal residence. You may be able to register a car in a state you don’t live in permanently if you fall into one of these gray areas.

• Deployed military — Some states allow deployed military members in the state to obtain a nonresident vehicle registration.
• College students — Out-of-state college students likely don’t need to register their car in the state where their school is located unless they want to establish residency.

Each state has its rules for how and when nonresidents are required to register vehicles in the state. Some will only issue temporary registrations under special circumstances, so do your research before visiting the DMV.

How to register your car in a different state

Once you’ve confirmed that you’re eligible to register a car in the state, many states require you to visit a local DMV office in person. Check online or call ahead to make sure you’ll be able to get your vehicle registered when you arrive. Bring all the necessary paperwork and a form of acceptable payment for the registration fees and applicable taxes.

FAQs about non-resident car registration

Your car insurance rates depend on various factors — your age, location, and in some cases, your credit scores.

Insurance companies claim that drivers with lower credit scores are considered higher risk because certain studies indicate a connection between how a person manages their finances and how likely they are to file an insurance claim. Taking a person’s credit scores into account when setting rates is part of how the insurance company matches policy premiums with the risk that a customer might pose.

Insurance companies don’t look at the same credit scores that lenders use to approve you for a mortgage or auto loan. Instead, they use a particular industry-specific insurance score calculated from information on your credit reports.

• Why do car insurance companies pull your credit?
• Types of auto insurance that may not require a credit pull
• How much do credit scores affect car insurance rates?
• Which states don’t allow credit checks for auto insurance rates?
• Auto insurance companies that don’t check credit scores
• Tips on how to raise your credit scores

Why do car insurance companies pull your credit?

Car insurance companies pull your credit-based insurance score and use it — along with other factors — to help assess risk and price your policy.

The Fair Isaac Corporation, creator of the commonly used FICO® credit-scoring model, introduced insurance scores in the early 1990s. Today, FICO estimates that 95% of companies that offer personal lines of insurance coverage use credit-based insurance scores to evaluate a customer’s risk — when allowed by state law.

While some credit pulls can lower your credit scores, this type of credit inquiry doesn’t. It’s considered a soft credit inquiry, similar to the credit pulls that occur when a company checks your credit to see if you qualify for a financial product like a credit card or loan. It might appear on your credit reports, but it doesn’t affect your scores.

Types of auto insurance that may not require a credit pull

Most auto insurance companies will check your credit-based insurance score as part of the underwriting process, if you live in a state that allows it.

But some will provide auto insurance without a credit check because they base your car insurance premiums on other factors.

Usage-based car insurance

Usage-based insurance policies base your premiums on how many miles you drive and your driving behavior rather than establishing an annual or semi-annual fixed rate.

These companies typically install a device on your vehicle that tracks …

• How many miles you drive
• When and where you go
• How fast you drive
• Whether you drive aggressively (rapidly accelerating, hard braking and cornering, etc.)
• Whether you’re involved in an accident that results in your airbag being deployed

Some insurance companies with usage-based policies will also check your credit as part of the underwriting process. And then they use telematics to collect information about your driving habits and potentially offer a discount for safe driving.

Before applying for one of these policies, make sure you understand what information the insurance company will collect and how it may be used, so you can find a program that’s a good fit for your situation.

Keep in mind that going with an insurer that doesn’t check credit doesn’t necessarily mean you’ll pay a lower rate than you would with a company that checks credit. If you drive long distances regularly, or if you often drive at certain times (especially late at night), you could pay more.

How much do credit scores affect car insurance rates?

Though your credit health can affect how much you pay for car insurance, insurance companies are generally not allowed to base approvals and rates solely on your credit scores.

Here are some other factors they consider.

• Your driving record
• Your location
• Your age, gender, and marital status
• The type of vehicle you drive
• Any discounts you may qualify for, such as those available for bundling home and auto insurance, being a safe driver or signing up for automatic payments

Which states don’t allow credit checks for auto insurance rates?

Currently, five states ban or limit insurance companies’ use of credit scores for setting policy rates. Those states are California, Hawaii, Maryland, Massachusetts and Michigan. But more states could take a similar approach soon.

There’s a bill moving through the Washington State Legislature that would prohibit the use of credit scores in insurance pricing. Oregon and Utah have taken a different approach and don’t allow insurance companies to cancel or refuse to renew coverage based on the policyholder’s credit — though it can be used when underwriting a new policy.

Auto insurance companies that don’t check credit scores

Not many insurance companies offer auto insurance policies without running some form of credit inquiry but here are a few to consider if you’re searching for a company that doesn’t check credit.

Cure Auto Insurance

Cure, which stands for Citizens United Reciprocal Exchange, is a nonprofit insurance carrier that bases rates on customers’ driving records. The company currently offers auto insurance in three states: Michigan, New Jersey and Pennsylvania.

Dillo Insurance

In Texas, Dillo Insurance provides auto insurance policies to customers with tickets, accidents, lapses in coverage or no prior coverage without checking credit.

Empower Insurance

Empower Insurance offers several car insurance options, some of which don’t use credit when calculating premiums. Empower is also only available in Texas.

Tips on how to raise your credit scores

Working with an insurance company that doesn’t require a credit check won’t necessarily mean saving on your auto insurance rates. You might pay less in the long run by working to increase your credit scores. Here are some tips.

• Review your credit report. Order free copies of your credit report from each of the three major credit bureaus at AnnualCreditReport.com and review them for errors. Common errors — incorrect reporting or the same debt appearing more than once — can lower your scores. Follow each agency’s instructions for disputing errors on your credit report, and you may see a change in your scores within a few months.
• Pay your bills on time. Your payment history significantly affects your credit scores, making up 35% of the FICO scoring model. If you’ve struggled to pay your bills on time in the past, consider setting up automatic payments or calendar alerts to avoid late payments.
• Keep your credit utilization low. Ideally, you should keep your credit card utilization rate — the percentage of your available credit you’re currently using — below 30%. If you’re carrying more debt than that on any one card or all your revolving accounts combined, try paying down those balances or asking your credit card company for a credit limit increase.

What’s next?

If you need car insurance and don’t have a great credit-based insurance score, don’t panic. Credit is only one of many factors insurance companies use to determine how much you’ll pay.

Shop around with a few different companies to compare rates and coverages. If you have a clean driving record, you might find that you qualify for affordable car insurance despite your credit concerns.

How do you get from finding the home you love to move-in day?

Part of the homebuying process involves mortgage loan underwriting. Loan underwriting is what happens behind the scenes after you submit a loan application. The underwriter is a person who takes an in-depth look at your credit and finances to decide whether you’re eligible for a loan according to the lender’s unique guidelines.

• What is loan underwriting?
• Are underwriting rules the same for all home loans?
• What to expect from the loan underwriting process

What is loan underwriting?

Loan underwriting is a process that lenders go through to decide whether to offer credit — and how much — to a particular borrower.

Each lender or loan program has minimum requirements that the loan underwriter bases decisions on. Any time a bank or lender makes a loan, it takes on some level of risk. Loan underwriting helps ensure that the lender makes a sound judgment about an applicant’s ability to afford the loan and its monthly payments.

Are the underwriting rules the same for all home loans?

Approval requirements differ from lender to lender and program to program.

For a home loan, some of the factors a mortgage underwriter considers might include the following:

• Assets — The underwriter must confirm that you have the income and sometime other assets (such as savings) to afford the loan.
• Credit history — Lenders pull credit reports and credit scores from one or more of the three major credit bureaus and review them for things like payment history and amounts owed. They can also check to see if you have any recent bankruptcies or foreclosures.
• Debt-to-income ratio — An underwriter may calculate your debt-to-income ratio by dividing your monthly debt payments (including the new mortgage payment) by your monthly income before taxes. This helps the underwriter determine whether you can afford to make the mortgage payments and other obligations.
• Employment history — Lenders tend to prefer loaning money to people who have a stable employment history.
• Income — The underwriter may review your pay stubs, W-2s, recent tax returns and other documents to confirm that the income you reported on your mortgage application is accurate.
• Loan-to-value ratio — The underwriter divides the mortgage amount by the sales price or appraised value of the home to determine the loan-to-value ratio. Typically, if your LTV is higher than 80% on a conventional mortgage, you’ll have to pay private mortgage insurance, or PMI, in addition to your mortgage. PMI is an insurance policy that protects the lender if you default on your mortgage.

Understanding lender overlays

Different types of mortgages, including conventional mortgages and those guaranteed by the Federal Housing Administration, U.S. Department of Agriculture or Department of Veterans Affairs, have their own varying underwriting standards.

In addition, the lenders that make these loans may have their own requirements. These lending requirements are called lender overlays. They’re an additional set of more restrictive requirements that lenders add to the existing requirements of Fannie Mae, Freddie Mac, the FHA, VA or USDA to offset risk.

One of the most common lender overlays involves your credit scores. For example, according to FHA loan guidelines, borrowers must have credit scores of at least 500 to qualify for FHA-insured financing. But an individual bank or lender may have a lender overlay requiring higher credit scores.

Other potential lender overlays include …

• Maximum loan-to-value ratio
• Maximum debt-to-income ratio
• Minimum number of credit accounts and years of credit history
• Minimum employment history
• Restrictions on the types of property eligible for a mortgage
• Waiting periods after a bankruptcy
• Cash reserves
• No unsettled or delinquent debts on your credit report

What to expect from the loan underwriting process

While underwriting requirements vary by lender, loan underwriting usually follows a standard set of steps. Here’s what you can expect from the mortgage underwriting process.

Step 1: Apply for a mortgage

You may be asked to fill out a mortgage application online, over the phone or in person, depending on the lender. When you apply for a mortgage, you give the lender permission to check your credit and review your personal and financial information.

Step 2: Provide proof of income, assets and debts

In addition to filling out a mortgage application, lenders require you to provide documents to verify the information included on the application. This can include …

• Pay stubs, W-2s and 1099s
• Copies of recent tax returns
• Financial statements for any businesses you own
• Copies of any lease agreements
• Bank statements and statements for investment accounts and retirement accounts

Depending on the lender’s requirements and your unique financial situation, you may have to provide additional documents, such as a copy of your divorce or separation agreement, proof of sale for your prior home and more.

Step 3: Order an appraisal

The lender will typically order an appraisal by a state-licensed or certified appraiser. The purpose of the appraisal is to confirm the property’s market value and verify that it works as collateral for the mortgage.

Step 4: Perform a title search

Lenders may also hire a title company to perform a title search. The title company searches public records to confirm that the seller has a legal right to sell the property, and there are no judgments, liens, unpaid taxes or other issues with the title that would prevent the seller from transferring a clear title.

Step 5: Await the underwriter’s decision

Once the underwriter has all the necessary information, they’ll compare it to their underwriting guidelines and decide whether to approve the loan. The entire process can take from a few days to several weeks, depending on your financial situation, the type of loan you’re applying for and how long it takes to complete the appraisal and title search.

The time it takes for a decision also depends on whether your application qualifies for automated underwriting or has to go through manual underwriting. Automated underwriting means a computer algorithm automatically approves people (or not) based on the lender’s preferred criteria.

If you don’t meet the lender’s preferred criteria, your application may be referred to manual underwriting. This means a human then reviews your financial information and decides whether you can qualify for a loan. Manual underwriting typically takes longer.

If you’re not approved — or the amount is different than you expected — you’ll want to understand why so you can have a better chance if you apply again in the future or with a different lender.

What’s next?

When you’re ready to buy a home, you want the loan underwriting to go smoothly so you can close your loan on schedule. Here are some tips to improve your experience.

• Check if your finances are ready to buy a house. Start by reviewing your credit scores and ordering a free copy of your credit reports. Review the reports for potential issues. If you find any errors that might be dragging your credit scores down, follow the credit bureau’s steps to dispute the errors on your credit reports. Save up for a down payment, and pay down credit cards to improve your debt-to-income ratio.
• Get prequalified for a mortgage. A mortgage prequalification gives you an estimate of how much of a mortgage you might be approved for, based on your credit scores and basic information about your finances.
• Figure out how much home you can really afford. The amount you get approved to borrow for a home may be more than is healthy to take on. Try using a home affordability calculator to get an idea of what’s truly within your means.
• Respond quickly to requests from the underwriter. The underwriter may call or email you to request more information or additional documentation during the underwriting process. Respond to any requests promptly to keep your loan application moving.

Want to learn more? Check out some of our top mortgage lenders for first-time homebuyers.

• Homebridge Mortgage: Homebridge offers resources that specifically cater to first-time homebuyers.
• Rocket Mortgage: Consider Rocket Mortgage if you’d prefer an online-first experience.
• PennyMac Mortgage: PennyMac offers a wide variety of home loans and shares current rates on its site, which can be helpful for people looking to buy their first home.
• USAA Mortgage: USAA is a good option for military members and their families. 

The Federal Housing Administration, or FHA, has limits on the size of mortgages it will guarantee.

FHA loans are a good option to consider for people who need a low down payment and flexible credit-approval terms to buy a home. FHA loans don’t have income limits for borrowers. Instead, the agency has a maximum loan amount it will insure, known as an FHA loan limit.

FHA loan limits vary by housing type and are based on the state and county in which the property is located. FHA loan limits in 2024 range from $498,257 in “low-cost” areas to up to $1,149,825 in “high-cost” areas for single-unit homes.

You can check what the limit is in your area by searching the FHA mortgage limits database.

• How FHA loan limits work
• What are 2024 FHA loan limits?
• How FHA loan limits are set
• Can I get a loan higher than the FHA loan limit?

How FHA loan limits work

The federal government supports homeownership in a variety of ways.

One way is by backing or guaranteeing loans made by banks and other lenders, which helps to make mortgages more available. The Federal Housing Administration — a division of the U.S. Department of Housing and Urban Development, or HUD — insures FHA loans by guaranteeing the lender that it will repay the balance of a borrower’s loan if the borrower stops making payments.

This guarantee means banks are more willing to lend money to borrowers who may not otherwise qualify for a home loan.

With more forgiving minimum credit score requirements and low down payment options, FHA loans can be appealing to low- to moderate-income and first-time homebuyers. But there are no income caps, and they’re available to repeat buyers.

On the other hand, the FHA limits the amount you can borrow.

What are 2024 FHA loan limits?

The FHA establishes loan limits annually based on the median home prices in metro areas and counties. The maximum loan amount is 115% of the area’s median home price, subject to a national floor and ceiling.

In 2024, the national floor is $498,257, and the national ceiling is $1,149,825. But if 115% of the median house price in a certain area was $330,000, the FHA could still insure mortgages up to $498,257 in that area.

Likewise, if 115% of the median house price in a certain area was $1.2 million, the FHA would cap mortgages in that area at $1,149,825. The FHA insures home loans with a principal balance at or under the ceiling.

Some of the areas with FHA loan limits at the ceiling include Breckenridge, Colorado; Jackson, Wyoming; and most of the counties making up the Bay Area of California, the New York City/Newark New Jersey metro area and the Washington, D.C. metro area.

The FHA adjusts the upper mortgage limits for Alaska, Hawaii, Guam and the U.S. Virgin Islands to account for the higher cost to buy a house in these areas.

How FHA loan limits are set

FHA loan limits are set according to a specific formula created by federal law.

The national ceiling and floor are based on median housing prices in accordance with the National Housing Act,  according to HUD. The national FHA loan limit floor is 65% of the conforming loan limit, and the ceiling is 150% of the conforming loan limit.

In 2024, for example, the maximum conforming loan limit for a single-family property was $766,550. 65% of that amount is $498,257  — the FHA loan national floor. And 150% of that amount is $1,149,825.

The FHA typically announces loan limits for the coming year toward the end of the current year, following the Federal Housing Finance Agency’s announcement of conforming loan limits.

Can I get a loan higher than the FHA loan limit?

If the cost of the property you want to buy is greater than the standard FHA loan limit, you may still be able to use an FHA loan to finance the purchase. The mortgage amount needs to fall within the FHA loan limit available in your area. These loans are known as FHA jumbo loans.

But there are a few things to understand before you go this route.

• No cash back — Some buyers may wonder if it’s possible to apply for a loan that’s greater than the value of the home and get the remainder in cash at closing. Cash back isn’t allowed with FHA purchase loans. There are certain exceptions, but unless you’re getting a refund of something paid upfront that was later financed into the mortgage amount, don’t expect cash back.
• Higher minimum credit scores — Standard FHA loans require borrowers to have minimum credit scores of 500 or better (though some lenders have overlays requiring higher credit scores). Depending on the lender, the minimum credit score may be even higher for FHA jumbo loans.
• Higher loan costs — The cost of an FHA jumbo loan may be higher than the cost of a typical mortgage.
• No down payment assistance — Traditional FHA loans allow borrowers to get down payment assistance from programs sponsored by state or local governments and other organizations.

Next steps

If you’re interested in using an FHA loan to finance your home, the next step is to apply for a mortgage with an FHA-approved lender. Not all banks and mortgage companies offer FHA loans, so check with your bank or use the HUD lender list search to find an FHA-approved lender in your area.

Be sure to shop around, as interest rates and requirements vary from lender to lender, even for the same type of mortgage.

Calculate your FHA loan

Find out how much your monthly mortgage could be with our FHA loan calculator.

FHA loans make it possible for some people to get a mortgage without a large down payment.

Saving up for a big down payment on a home is a financial obstacle for many would-be homeowners. Fortunately, FHA loans can help homebuyers afford a mortgage loan by offering flexible home loan requirements, including low down payments and lower minimum credit scores.

To help you figure out whether an FHA loan makes sense for you, we’ll go over the basic requirements for qualifying for an FHA loan — including the conditions that borrowers, and the property they want to buy, must meet. Let’s dive in.

• What are FHA loans?
• FHA loan requirements for homebuyers
• FHA property requirements

What are FHA loans?

FHA loans are guaranteed by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development, or HUD. This means that if you buy a home using an FHA loan and stop making mortgage payments, the federal government will repay the guaranteed portion of the loan.

While FHA loans are a popular type of mortgage for first-time homebuyers because of their low down payment requirements and low minimum credit scores, they’re not limited to first-time homebuyers.

FHA loan requirements for homebuyers

FHA-backed loans have flexible lending requirements, but not all borrowers will be approved. Here’s what you need to know about qualifying for an FHA loan.

General requirements

To be eligible for an FHA loan, you generally need to …

• Have a valid Social Security number
• Be old enough to enter into a contract in the jurisdiction where the property is located (in most states, the legal age is 18)
• Have no bankruptcies within the past two years
• Have no short sales, foreclosures or deeds in lieu of foreclosure within the past three years
• Intend to occupy the home as your principal residence — FHA loans are not available for investment property or vacation homes

Minimum credit score

To qualify for an FHA loan, you need to have a credit score of at least 500. But if your credit score is below 580, you will need to come up with a higher down payment. FHA loans allow borrowers with a credit score of 580 or above to purchase a house with a down payment as low as 3.5% of the purchase price. Borrowers with credit scores between 500 and 579 need at least 10% down.

Keep in mind, these are the minimums set by HUD, but lenders may have their own minimums. These are called “lender overlays” because they’re additional guidelines set by lenders that lay on the FHA guidelines. For example, some lenders may not approve FHA loans for borrowers with credit scores below 600.

Maximum debt-to-income ratio

Your debt-to-income ratio, also known as DTI, is the percentage of your monthly gross income that goes toward paying debts. For example, if your gross monthly income is $6,000 per month and your monthly debt payments (including your rent or mortgage) are $3,000, your DTI is 50%.

FHA lenders consider two DTIs when evaluating whether you can afford your mortgage:

• Front-end DTI — This includes only housing-related expenses, such as your mortgage’s monthly principal and interest payments, property taxes, insurance and any homeowners association dues.
• Back-end DTI — This includes all of your minimum required monthly debt payments, including housing-related expenses and payments toward credit cards, student loans, car loans, alimony, child support and other debts.

For many FHA borrowers, the maximum allowable front-end DTI ratio is 31%, and the maximum allowable back-end DTI ratio is 43%. But lenders may approve borrowers with higher DTIs if they have other compensating factors, which are other positive aspects of your loan application that help offset negatives. Compensating factors can include:

• Having a large amount of savings in reserves
• Having no discretionary debt, such as from credit cards or auto loans
• Having significant income beyond the income taken into account when calculating DTI, such as overtime, bonuses and part-time or seasonal work

Mortgage insurance premiums

Most FHA loans require borrowers to pay both an upfront mortgage insurance premium and a monthly premium, which protects the lender if you default on your mortgage. While conventional loans may require private mortgage insurance, or PMI, when the borrower puts less than 20% down, FHA loans require mortgage insurance regardless of your down payment.

The amount you’ll pay depends on the size of your loan. The upfront MIP is 1.75% of your loan amount. You can pay it in full at closing or finance it into your loan in full.

The monthly MIP depends on your loan amount, the size of your down payment, and your loan term.

FHA property requirements

FHA loans require an appraisal from an FHA-approved appraiser. This is to establish the fair market value of the property and ensure the home meets minimum requirements. The appraisal is not a home inspection and the FHA official site advises, “for your protection, get a home inspection” in addition to an appraisal.

FHA minimum property requirements are designed to minimize the FHA’s financial risk by requiring that any home financed with an FHA loan is …

• Safe — The property’s condition won’t threaten the health or safety of its occupants.
• Sound — The home is structurally sound, meaning it hasn’t decayed, deteriorated, or been damaged in a way that may be of structural concern.
• Secure — The home can serve as good collateral for the loan.

The factors the appraiser will consider are outlined in detail in HUD Handbook 4000.1. In general, the property must …

• Be safely and reasonably accessible
• Have working utilities, including electricity and/or gas and sewer
• Be free from contaminants and insect infestations
• Be free of chipping or peeling lead-based paint
• Have adequate ventilation in attic and crawl spaces
• Have access to clean water, either from a public water supply system or well
• Have a working heating system that can heat the property adequately
• Be free of interior or exterior health and safety hazards

If the appraisal uncovers issues that make it ineligible for an FHA loan, you may be able to work with the seller to make the necessary repairs before closing.

In addition to the property requirements, there is a limit to the amount you can borrow using an FHA loan. These loan limits vary by county and are subject to change. You can look up the limit for your area using HUD’s FHA Mortgage Limits Search tool.

Next steps

If you’ve reviewed the FHA home loan requirements and think an FHA loan might be a good fit for you, the next step is to apply for a mortgage with an FHA-approved lender. Many banks and mortgage companies offer FHA loans, so consider checking with your local branch.

Be sure to shop with more than one lender, as different lenders have different overlays and mortgage rates can vary from lender to lender, even for the same type of mortgage.

Calculate your FHA loan

Find out how much your monthly mortgage could be with our FHA loan calculator.

Whether you’re a first-time homebuyer, downsizing in retirement or somewhere in between, getting approved for a mortgage takes time.

For that reason, it’s a good idea to begin preparing for the home loan approval well in advance — maybe even a year ahead of time, in some cases — for best results.

To help you prepare, we’ll go over the process of applying for a home loan and what it takes to get approved.

• Loan approval, preapproval and prequalification
• Loan approval basics
• 5 loan types with different approval guidelines
• 4 steps to prepare for the home loan approval process

Loan approval, preapproval and prequalification

Though you might hear the terms “prequalified” and “preapproved” used interchangeably, they generally have different meanings when it comes to mortgages — though neither actually refers to full loan approval. So let’s understand exactly what each of those terms typically means.

Prequalification

Prequalification is usually one of the first steps in the homebuying process. When you get prequalified for a home loan, you’re essentially getting an estimate of what you may be able to borrow. You get this by providing some basic information about your finances to the lender and allowing it to check your credit.

After getting prequalified, you can begin shopping for a home with a better idea of how much home you can afford.

Preapproval

Getting preapproved for a home loan takes the prequalification a step further. For preapproval, you complete a mortgage application, and the lender verifies information on your application by running your credit and reviewing your pay stubs, bank statements, tax returns and other documents.

Once you’ve been preapproved, the lender will issue a preapproval letter, which is essentially an offer to lend you a certain amount. But preapproval isn’t a firm commitment to issue a loan. If your credit drops significantly or your financial situation changes before final loan approval, you may not be able to get the mortgage.

Loan approval basics

When deciding whether to approve your mortgage application and what loan terms to offer, lenders look at several factors, including the following.

Qualifying income

Lenders want to know that you have enough income to cover your mortgage payment as well as other regular living expenses and debt payments, but not all income counts in their determination. Here are some of the sources of income that lenders may count.

• Salary and wages
• Overtime that meets lender requirements
• Commissions that meet lender requirements
• Income from self-employment or a business you own
• Interest and dividend income
• Social Security benefits
• Income from a rental property
• Alimony and child support payments

Dependable payment history

Lenders review your credit reports and credit scores, in part, to determine whether you’re likely to make your monthly mortgage payments on time.

FICO® scores

When lenders run your credit, they typically request a credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion), plus the FICO credit scores for those reports. Each lender or mortgage program has its own minimum credit score requirements, but conventional loans usually require a FICO score of at least 620.

No delinquent accounts at the time of your application

Currently delinquent accounts on your credit reports can seriously drag down your credit scores and make it harder to get loan approval. While some lenders may be willing to approve your application, they may charge you a higher interest rate or require you to make a larger down payment.

Acceptable debt-to-income ratio

Your debt-to-income ratio is the percentage of your gross monthly income that goes toward outgoing debt, including your mortgage payment. DTI requirements vary by lender.

5 loan types with different approval guidelines

When you’re shopping around for a mortgage, you have many options to choose from, and each lender and loan program has different approval guidelines. Here are a few common types of home loans and an overview of the requirements for each.

VA loans

The U.S. Department of Veterans Affairs backs VA loans, which aren’t available to the general public — only to eligible veterans, active military members and certain qualifying surviving spouses of military members who died as a result of military service.

VA loans don’t have a VA-defined minimum credit score, but you must have a Certificate of Eligibility from the VA to prove to your lender that you qualify based on your service history and status.

FHA loans

FHA loans are backed by the Federal Housing Association, which is a part of the U.S. Department of Housing and Urban Development.

The minimum credit score for an FHA loan varies by lender, but can’t be less than 500, according to HUD rules.

USDA loans

The U.S. Department of Agriculture backs mortgages for borrowers interested in buying homes in rural areas.

USDA loans don’t have minimum credit score requirements, but they do have income limitations, which vary by location.

Construction loans

If you need financing to build a home, a construction loan can help you cover the cost of buying land (if needed) and building the house.

If you want to act as your own contractor, discuss this with a loan officer — your financial institution may not permit you to do so. As part of the loan approval process, the lender will review your contractor’s experience, reputation, credit and licenses to ensure the contractor can get the job done on time and within a reasonable budget.

Condo loans

Many lenders, including participating FHA lenders, offer home loans to purchase a condominium unit. Getting approved for a condo loan is similar to getting approved for a mortgage on a single-family house. But to use an FHA loan to buy a condo, the project has to meet HUD’s eligibility requirements and be included on or added to the FHA’s approved condominium project list. Conventional condo loan requirements may vary depending on the lender.

4 steps to prepare for the home loan approval process

Applying for a mortgage is never simple, but it’s even trickier when you’re not prepared. To make the loan approval process easier on yourself, give yourself plenty of time to get your finances in order.

1. Check your credit reports and credit scores. Ensure there aren’t any errors dragging your scores down. If you do find inaccuracies, dispute them with the credit bureaus. Disputes can take 30 days — or longer — to resolve, depending on your circumstances, so start this process early.
2. Improve your DTI ratio. You’ll be able to qualify for a larger mortgage if you earn more money or pay off other debts before applying.
3. Save up for your down payment and closing costs. You may qualify for a mortgage with a small down payment, but a larger down payment reduces your principal balance on the loan, saving you money over the term of the mortgage. Closing costs are the expenses you pay in cash on closing day (not included in the loan amount) and you’ll need to save up for those as well.
4. Gather your paperwork. To save time, it’s a smart idea to start gathering the documents you’ll need to apply for a mortgage. Most lenders want to see pay stubs for the past month, W-2s and tax returns for the past two years, a few months’ worth of bank statements, and recent statements from other loans and asset accounts.

What’s next?

Nothing can guarantee that your loan approval process will go smoothly, but the better prepared you are, the easier it should be to get the mortgage you need to buy the home you want. You can begin by checking your credit to see what steps you might need to take next.

Want to learn more? Check out some of our top mortgage lenders for first-time homebuyers.

• Homebridge Mortgage: Homebridge offers resources that specifically cater to first-time homebuyers.
• Rocket Mortgage: Consider Rocket Mortgage if you’d prefer an online-first experience.
• PennyMac Mortgage: PennyMac offers a wide variety of home loans and shares current rates on its site, which can be helpful for people looking to buy their first home.
• USAA Mortgage: USAA is a good option for military members and their families. 

When you need to move money, you have multiple options. You could write and mail a paper check, or you can transfer money digitally between accounts using the Automated Clearing House (ACH) network.

In fact, you may already send or receive ACH payments, which are also known as electronic checks and direct deposits.

Trillions of dollars — yes, that’s trillions with a T — move through the ACH system each year. Funds travel over the ACH network, which connects thousands of financial institutions across the country.

Let’s look at what ACH payments are, how they work and what you should know when making an ACH payment.

• What is an ACH payment?
• What are the benefits of ACH payments?
• What are the disadvantages of ACH payments?
• What’s the difference between ACH payments and other types of electronic transfer of funds?
• Next steps: Try reducing your risk of ACH fraud

What is an ACH payment?

An ACH payment is an electronic transfer from one bank account to another. With this type of payment you don’t have to use paper checks, wire transfers, credit card networks or cash.

Individuals and businesses can send and receive ACH payments. There are two ways to make ACH payments — ACH debit and ACH credit.

ACH debit

When you authorize a payee to request a withdrawal of funds from your bank account, that’s an ACH debit. The person receiving the payment initiates the transaction.

For example, you might authorize your power company to automatically pull your monthly utility bill from your bank account via ACH. You give the power company your bank account information and permit it to withdraw money from your account each month.

Here’s a somewhat simplified explanation of what happens behind the scenes.

1. The power company creates a digital file of payment instructions (including your payment and other customer payments) and sends it to its bank.
2. The bank deposits the payment into the power company’s account and creates an electronic batch file of all payment instructions to send to the ACH network.
3. The ACH processor receives the instructions from the bank, sorts them into separate files for every bank from which it needs to pull customer payments, and sends payment instructions to each bank.
4. Your bank receives an electronic file from the ACH processor and withdraws your payment from the account.

ACH credit

An ACH credit sends funds from an account — you initiate the payment. For example, you might set up automatic bill pay with your bank to pay your rent or mortgage each month. Instead of having another company “pull” payments from your checking or savings account, you “push” payments from your account.

The behind-the-scenes steps are similar to the ACH debit transaction process outlined above — but instead of your mortgage company or other service provider initiating the ACH payment, you kick it off by sending instructions to your bank. You typically do that by logging into your account via your bank’s website or mobile app, but you may be able to set up an ACH payment over the phone or in writing by visiting a bank branch.

It’s important to note that with either type of payment — ACH debit or ACH credit — both the payor and the payee must agree to the transaction. Your power company can’t pull your monthly payment from your bank account without your consent. And you can’t pay your landlord via ACH credit unless they agree to receive the money electronically.

What are the benefits of ACH payments?

Using ACH payments to send and receive money offers several benefits.

Fast

ACH payments are typically processed faster than sending a check through the mail. When someone mails a paper check, it can take days for it to arrive at its destination. Then the recipient needs to process the mail and deposit the check. Depending on the amount, the bank may hold part of the deposited check for one or two business days. All told, it can take a week or more to make a payment via paper check.

On the other hand, ACH payments may be available the same or next business day, or within a day or two. Direct deposits, such as your paycheck, are typically available on the day they’re made.

Secure

When you mail a paper check, there’s always a chance it will get lost or stolen along the way. If someone steals your check, it could be altered and cashed before you realize it went missing.

If you send a paper check to your utility company and it gets lost or stolen before reaching its destination, your utility company might charge a late fee. Plus, you may need to contact your bank to stop payment on the missing check. Most banks charge a stop payment fee of $25 to $35 to stop payment on a check.

Transferring your money electronically means your information is protected by bank-level encryption.

Low cost

Many businesses accept credit card payments, but the processing fees tend to be high. According to the payment processing company Square, credit card processing fees average between 2.87% and 4.35% per transaction.

The cost of sending an ACH payment, on the other hand, is typically less than $0.50 per transaction.

As a consumer, you may not worry about credit card processing fees when you swipe your credit card to buy gas, groceries or a new pair of shoes. But if you own a small business or do freelance work, the savings of getting invoices paid via ACH instead of a credit card can add up.

Also, since businesses can pass payment processing fees on to consumers, lowering the cost of doing business with ACH payments can mean lower costs for their customers.

Convenient

For one-time payments, it might be easier to pay by cash, check or credit card. But for recurring transactions, such as a mortgage payment, ACH payments offer convenience. You don’t have to worry about waiting for your bill to arrive, staying on top of payment deadlines, or buying postage. You can set up automatic bill payment via ACH transaction and have the money withdrawn from your account when it’s due.

What are the disadvantages of ACH payments?

There are a few downsides to ACH payments.

Set-up costs for businesses

As a consumer, you may never have to deal with ACH payment fees. If your bank offers free online bill pay, you can schedule and send ACH payments for free.

But businesses that want to accept ACH payments from their customers or pay employees via direct deposit may have to pay to set up a merchant account and face per-transaction fees and other ACH fees. Still, businesses may be able to offset the cost of ACH payments by lowering or avoiding credit card processing fees and the labor involved in processing paper checks.

Set it but don’t forget it

Using ACH credit or debit payments to pay recurring bills can be convenient. But it’s important to keep enough money in your bank account to cover the payments you’ve set up. If a company bills you and you don’t have enough money in your account to cover the ACH transaction, you could face overdraft and/or nonsufficient funds fees.

And a company could possibly bill you for an incorrect amount. For unauthorized ACH payments, you have 60 days from the date you received your bank statement to notify the bank of the error. Then the bank has 10 days to investigate the issue. If, after 10 days, the bank hasn’t resolved the issue, it’s required to temporarily credit your account for a portion of the disputed amount. Then it has 45 more days to investigate.

Still, money may be missing from your account while all of this goes on, which could make it difficult to pay other bills.

Transaction limits

The National Automated Clearing House Association, or NACHA, oversees the ACH network and caps ACH payments at $25,000 per transaction.

While this limit might be more than enough to cover most transactions initiated by individuals, it might not be enough for some large companies — such as a business that needs to make a $30,000 loan payment.

In addition, federal law limits customers to just six transfers per month out of a savings account or money market account. If you go over that limit — which doesn’t apply to checking accounts — your bank could charge a withdrawal limit fee, reject the transfer request, close your account, or convert it into a checking account.

The Federal Reserve Board temporarily lifted this rule, known as Regulation D, because of the COVID-19 pandemic. But the agency hasn’t yet announced how long it will waive those transaction limits.

What’s the difference between ACH payments and other types of electronic transfer of funds?

Are ACH payments right for you? To help you decide, here are how these types of transactions compare to other payment options.

ACH payments vs. wire transfers

Both ACH payments and wire transfers move funds electronically from one financial institution to another. But ACH payments are low-cost, whereas wire transfers cost money for both the sender and receiver. According to MyBankTracker, the average wire transfer within the U.S. costs $15.50 for the sender and $18 for the receiver. International wire transfers can cost even more.

One reason wire transfers may cost more is that they’re processed individually on a transaction-by-transaction basis directly from bank to bank, while ACH transactions are batched together for processing through a clearinghouse. Wire transfers are also generally completed in one business day or less.

ACH payments vs. EFT

People might use the terms ACH and EFT (electronic funds transfer) interchangeably, but they’re not the same. All ACH payments are EFT payments, but not all EFTs are ACH. EFT is a general term that covers many different methods of electronically transferring money from one bank to another, including wire transfers, credit and debit card payments and ACH payments.

The term ACH refers only to direct payments that take place on the ACH network.

ACH payments vs. direct deposit

Direct deposits are a type of ACH payment made via the ACH system. They’re commonly used for payroll, Social Security and tax refund payments.

Next steps: Try reducing your risk of ACH fraud

While ACH transactions are generally more reliable than a check, they’re not risk-free. Anyone who gets ahold of your bank account number and routing number can attempt a fraudulent ACH transfer from your bank account.

To help reduce your risk, follow these best practices.

• Safeguard your financial account information by keeping anti-virus software and firewall software up to date on your PC.
• Use strong passwords for your online accounts and don’t repeat passwords across accounts.
• Monitor your bank account for transactions you don’t recognize. Review online accounts daily or weekly, or set up alerts so you’ll know whenever a transaction hits your account. If you notice any strange withdrawals, notify your bank immediately.
• Don’t give out your bank account information over the phone or online unless you’re sure you’re dealing with a reputable company.
• Don’t log into your bank account from a shared computer or on public Wi-Fi.

This article was fact-checked by our editors and CPA candidate Janet Murphy, senior product specialist with Credit Karma.

Pay the tax bill now? Or pay it later? That’s the question you need to answer if you’re thinking about converting a traditional IRA to a Roth IRA.

Money you take out of a traditional IRA (known as “distributions”) is generally taxable in retirement. Distributions from a Roth IRA generally are not taxable. If you think you’ll be in a higher tax bracket in your retirement years, converting a traditional IRA to a Roth IRA lets you pay the tax bill now and enjoy tax-free distributions in retirement. 

But is a traditional IRA conversion to a Roth IRA a good move? It depends. Also, if you don’t meet certain income requirements, a conversion may not even be possible for you.

• Roth vs. traditional IRA: What’s the difference?
• What is a Roth conversion?
• When does a Roth conversion make sense?
• Things to know about converting an IRA to a Roth
• How to report a Roth IRA conversion at tax time

Roth vs. traditional IRA: What’s the difference?

Both traditional and Roth IRAs are tax-advantaged retirement accounts that help people save for retirement. But there are key differences to understand before choosing between the two types of accounts.

What is a Roth conversion?

A Roth IRA conversion takes all or part of the balance of a traditional IRA and rolls it into a Roth IRA. There are a few reasons this might be appealing.

• Tax-free income in retirement — Withdrawals from a traditional IRA are usually taxable, which means you’ll owe taxes on the earnings and any contributions that you deducted on your taxes. With a Roth IRA, withdrawals are tax-free.
• No required minimum distributions — With a traditional IRA, you must take required minimum distributions, or RMDs, once you reach age 72 (as long as you reach age 70½ after 2019). Roth IRAs don’t have RMDs, so your money can stay in the account and continue to grow tax-free. Your account can also provide tax-free retirement income for your heirs if you don’t use the funds in your lifetime.
• Bypassing Roth income limits — If your income is too high, you typically can’t contribute to a Roth IRA. For the 2019 tax year, a single person had to have a modified adjusted gross income, or MAGI, of $137,000 or less to contribute to a Roth — and a married couple filing jointly had to have a MAGI of $203,000 or less. But a “backdoor” Roth conversion gets around these income limits by having you first make a nondeductible contribution to a traditional IRA, and then having you convert your traditional IRA to a Roth IRA. There are no income limits on who can contribute to a traditional IRA. 

When does a Roth conversion make sense?

The downside to making a rollover into a Roth is that you have to pay the tax bill the year you make the conversion. You’ll have to report the conversion on your federal income tax return and pay any tax due by the tax deadline — typically April 15. 

On the other hand, when you withdraw the money in retirement, you won’t have to pay federal income tax on the distribution. So a Roth IRA conversion might make sense if you believe your tax rate is lower now than it will be when you start taking withdrawals in retirement. But it’s a bit of a guessing game, as no one really knows what the tax rates will be in the next 10, 20 or 30 years. 

Still, there may be ways to manage the tax you’ll pay on a Roth conversion. Some options may include …

• Converting earlier in the year to give yourself more time to pay the tax, which will likely be due on April 15 of the following year. 
• Spreading the conversion out over a few years by converting only part of your traditional IRA now. This allows you to spread the tax payments over multiple years, too.
• Making the conversion in a year in which you have losses or tax deductions that will offset the tax.

Things to know about converting a traditional IRA to a Roth

Making an IRA-to-Roth conversion can impact your retirement earnings and tax liability in several ways. Here are a few other things to know before you make the move. 

You can’t undo a Roth conversion

In the past, if you made an IRA-to-Roth conversion and then decided it wasn’t the right move, you could fully or partially reverse the conversion before filing your tax return for the year.

Thanks to the Tax Cuts and Jobs Act of 2017, undoing a Roth conversion is no longer an option. So it’s a good idea to discuss the decision with a tax adviser to ensure you know how the Roth conversion will impact your taxes.

You should pay the tax on a Roth conversion with nonretirement funds

Before making a Roth conversion, you need to make sure you’ll have the funds available to pay the resulting tax bill, and you won’t want to use money from the Roth to pay the tax.

There are several reasons it’s a bad idea to use part of your retirement savings to pay the Roth conversion tax.

• Less tax-free growth — Any retirement funds you use to cover the tax bill won’t be available to grow tax-free.
• 10% penalty — If you’re under age 59½, you’ll likely have to pay a 10% early withdrawal penalty on any funds from your traditional IRA that aren’t converted into the Roth (unless you qualify for one of the penalty exempt exceptions). This 10% penalty is in addition to the income taxes you’ll pay on the conversion.

There’s a five-year holding period on Roth IRA withdrawals

IRS rules say that in most cases you have to wait five years before withdrawing money converted to a Roth IRA to avoid the early penalty. The penalty is 10%, if you do withdraw funds from your Roth within five years.  

How to report a Roth IRA conversion at tax time

Sometime in January or February in the year after you make the Roth conversion, you should receive Form 1099-R from the financial institution that held your IRA account. The 1099-R will show the amount converted in Box 1 and 2. In Box 7, there will be a distribution code to let the IRS know how your conversion should be taxed.

• Code 2 means you haven’t yet reached age 59½ and you may have to pay the 10% early withdrawal penalty on any portion of the distribution that isn’t converted into the Roth.
• Code 7 means you are age 59½ or older and you won’t have to pay the early withdrawal penalty, even if you don’t convert the entire amount distributed into the Roth.

You’ll use the information found on Form 1099-R to complete Form 8606. One of the form’s purposes is to report Roth conversions, so you’ll need to file this form along with your 1040 tax return for every year that you make a conversion.

Bottom line

Converting your traditional IRA to a Roth can potentially reduce your tax bill in retirement, but it can come with drawbacks. It’s probably a good idea to check with a tax professional on how such strategies can fit into your retirement plans. But now that Roth IRAs are not reversible, running the numbers and avoiding unintended consequences is more important than ever.

A senior product specialist with Credit Karma, Janet Murphy is a CPA candidate with more than a decade in the tax industry. She’s worked as a tax analyst, tax product development manager and tax accountant. She has accounting degrees and certifications from Clemson University and the U.S. Career Institute.You can find her on LinkedIn.

This article was fact-checked by our editors and CPA Janet Murphy, senior product specialist with Credit Karma.

Throughout your working career, you pay Social Security taxes with the hope that when you retire, you’ll receive some steady income in the form of Social Security benefits.

You may think that since paying tax led to those benefits, the benefits themselves shouldn’t be subject to federal income tax. But in certain circumstances, your Social Security benefits could be taxable.

Typically, you’ll only have to pay taxes on Social Security benefits if you have other substantial sources of income, according to the Social Security Administration. This includes income from self-employment, wages from a job, investment income like interest and dividends, or other forms of taxable income. And even if your benefits are subject to federal income tax, you’ll only pay tax on up to 85% of your benefits.

Here’s how to know whether your Social Security benefits are taxable and how big a bite the IRS could take.

• What kinds of Social Security benefits are we talking about?
• How are Social Security benefits taxed?
• Things to know about Social Security benefits

What kinds of Social Security benefits are we talking about?

When someone mentions Social Security, you may think of Social Security retirement benefits. But that’s just one form of Social Security benefits. Here are the types of benefits that the Social Security Administration pays to recipients who meet certain eligibility requirements.

• Retirement benefits — Paid to retired workers who are at least 62 years old, their spouses and their children
• Survivor benefits — Paid to the widows or widowers and children of deceased workers
• Disability benefits — Paid to workers who become disabled, or their spouses and their children

The SSA provides more information on these benefits and the types of beneficiaries who qualify to receive them. If you receive any kind of Social Security benefits, you should receive an SSA-1099 (or a 1042S if you’re a noncitizen who lives outside the U.S.) from the Social Security Administration detailing the total amount of your benefits from the tax year.

No matter which type of Social Security benefits you receive, if you have other sources of income, including a pension or annuity, a part-time job, or income from self-employment or investments, that additional income could cause at least part of your Social Security benefits to be taxable. The SSA says that about 40% of people who receive Social Security have to pay income taxes on their benefits.

That said, if Social Security is your only source of income in retirement, you probably won’t have to pay federal income tax on your benefits.

How are Social Security benefits taxed?

The good news is that no matter how much you earn, the IRS will treat no more than 85% of your Social Security benefits as taxable income. Here’s how to figure out how much of your benefits may be taxable.

Step 1: Determine your combined income

Do you have income in addition to Social Security? If so, you need to determine your “combined income.” Combined income is the total of your adjusted gross income (Line 7b on Form 1040) without Social Security benefits, plus nontaxable interest, plus one-half of your Social Security benefits.

For example, say Jodi had the following sources of income in 2019:

• $25,000 in wages from a part-time job
• $100 in nontaxable municipal bond interest
• $12,000 in Social Security retirement benefits

For 2019, Jodi’s combined income would be $31,100. That’s the $25,000 of wages, plus the $100 of nontaxable interest, plus half of her $12,000 in Social Security benefits.

Step 2: Determine your tax filing status

Once you know your combined income, you can compare that number to the threshold for your tax filing status. This will tell you how much of your Social Security benefits are taxable.

Here are the thresholds for the 2019 tax year.

• Single or head of household — If your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable. If your combined income is more than $34,000, up to 85% of your benefits may be taxable.
• Married filing jointly — If you and your spouse have a combined income between $32,000 and $44,000, up to 50% of your benefits may be taxable. If your combined income is more than $44,000, up to 85% of your benefits may be taxable.
• Married filing separately — If you’re married and file a federal income tax return separately from your spouse, you most likely have to pay taxes on your benefits.

Assuming Jodi’s filing status is single, up to 50% of her Social Security benefits would be taxable because her combined income is between $25,000 and $34,000 for 2019.

What if Jodi earned just $10,000 from her part-time job instead of $25,000? In that case, her combined income would be $16,100 (that’s $10,000 in wages plus $100 in municipal bond interest plus half of her $12,000 in Social Security benefits). Jodi’s combined income would be below $25,000, so none of her Social Security benefits would be taxable.

If you need help making your own calculations, Worksheet A in IRS Publication 915 can help you calculate exactly how much of your Social Security benefits are taxable.

What are 2019 standard deduction amounts?

For the 2019 tax year, the federal standard deduction amounts are …

·       $12,200 for single filers or those married filing separately

·       $24,400 for those married filing jointly or as qualifying widow(er)

·       $18,350 for head of household

Things to know about Social Security benefits

Here are some more things you need to know about taxable Social Security benefits.

Watch for Form SSA-1099

At the end of each year, the SSA will mail you a Social Security Benefit Statement, Form SSA-1099 (or a 1042S if you’re a noncitizen living outside the U.S.). This form shows you the total benefits you received. You’ll need this statement to calculate your taxable benefits and complete your federal income tax return.

If you’re ready to file your tax return but haven’t yet received Form SSA-1099, you can go online and print a replacement by logging into your Social Security account. Your Form SSA-1099 for the previous year is available after Feb. 1 of the current year.

You can have federal income taxes withheld from Social Security benefits

The IRS doesn’t require people to have federal income taxes withheld from their Social Security benefits, but you can choose to have taxes withheld instead of making quarterly estimated payments or owing a big chunk of change to the IRS at tax time.

You can ask the SSA to withhold federal income taxes from your benefit payments when you first apply, or start or adjust your withholding using Form W-4V.

When you complete Form W-4V, you can select the percentage of your monthly benefit you want the SSA to withhold: 7%, 10%, 12% or 22%.

After completing the form, sign it and return it to your local Social Security office, either by mail or in person.

If your only income is Social Security benefits, you may not have to file a tax return

When you retire, you could have multiple sources of income from retirement accounts like an IRA, a 401(k) or earnings from investments. But if your only source of income is your Social Security check, you might not have to file a federal tax return at all. Your filing requirement depends on your filing status, age and gross income.

Check out Charts A, B and C in the IRS Instructions for Form 1040 and 1040-SR or use the IRS’s Do I Need to File a Tax Return? tool to help you determine whether you’re required to file a tax return, or if you should file to receive a refund.

Only include benefits that are legally yours

If you and your child both receive Social Security benefits, the check for your child might be made out in your name. But your child’s portion of those benefits doesn’t count toward your taxable income. Be sure to use only your part of the benefits when calculating whether you might owe tax.

Add the benefits paid to your child (typically reported in Box 3 on your SSA-1099) to your child’s other income to see whether your child needs to file a tax return and whether any of their benefits are taxable.

Bottom line

If you receive Social Security benefits, take some time to figure out how much of your benefits may be subject to federal income tax. And check your state’s tax rules because some states with personal income tax systems exclude Social Security from taxable income, while others do subject Social Security income to state taxes.

While the rules and calculations might seem complicated, familiarizing yourself with them now can save you from an unwelcome surprise at tax time.

Relevant sources: Social Security Administration (SSA): Income Taxes and Your Social Security Benefit | SSA: Types of Beneficiaries | SSA: Replacement SSA-1099 | SSA: Retirement Benefits (2020) | IRS: Are Social Security Benefits Taxable? | IRS: 1040 and 1040-SR Instructions (2019) | SSA Blog: Get Your Social Security Benefit Statement (SSA-1099) | SSA: Withholding Income Tax from Your Social Security Benefits | IRS: Do I Need to File a Tax Return? | SSA: FAQs for Representative Payees | IRS FAQs: Survivor’s Benefits | IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits (2019)

A senior product specialist with Credit Karma, Janet Murphy is a CPA with more than a decade in the tax industry. She’s worked as a tax analyst, tax product development manager and tax accountant. She has accounting degrees and certifications from Clemson University and the U.S. Career Institute. You can find her on LinkedIn.

This article was fact-checked by our editors and a member of the Credit Karma product specialist team, led by Senior Manager of Operations Christina Taylor.

The deduction allows you to reduce your taxable income based on certain expenses related to using part of your home for business.

You can calculate your home office deduction in one of two ways. If you choose the more complex way (which has some advantages over the simpler method), you’ll need to complete and file Form 8829 with your federal income tax return.

Let’s look at the rules for claiming the home office deduction and when and how to complete Form 8829.

• What is the home office deduction?
• When do I need to file Form 8829?
• How do I fill out Form 8829?

What is the home office deduction?

The home office deduction allows a qualifying self-employed person who uses part of their home for business to lower their taxable income by deducting certain expenses related to the business use of their home. Lowering taxable income could, in turn, reduce a taxpayer’s federal income tax obligation.

The deduction isn’t limited to homeowners — it’s also available to renters, whether they live in a house, apartment, condo or another type of home. But not every self-employed person who works from home qualifies for the deduction. Here’s what you need to do to be eligible for the deduction.

1. Use your home office exclusively and regularly for business. Your home office doesn’t have to be a separate room in the house, but the space you claim must be used solely for work. In other words, a freelance writer who works from their kitchen table probably can’t take a deduction for that room. But if they have a desk in a room that they don’t use for any other purpose but business, that might qualify.
2. Use your home office as your principal place of business. That means you use your home to conduct a substantial portion of your work. Your home office doesn’t need to be the only place you do business, but it should be a place that you regularly and substantially use in the ordinary course of business. And if you have a separate structure, like a studio or garage, that you use exclusively for business, you may still be able to deduct expenses for it, even if it’s not your principal place of business.

There’s one final caveat when it comes to claiming the home office deduction: Before the Tax Cuts and Jobs Act of 2017, or TCJA, the home office deduction was available to both self-employed people and employees who had a home office for the convenience of their employers. But starting with the 2018 tax year, the TCJA made it impossible for employees to claim the home office deduction because it suspended certain miscellaneous deductions, including unreimbursed employee business expenses. For the 2018 through 2025 tax years, taxpayers who are employed by someone else are out of luck (unless Congress changes the current tax rules).

When do I need to file Form 8829?

If you qualify for the home office deduction, you might need to complete Form 8829 to take advantage of the tax break. But there are two ways to calculate the home office deduction, and only one of them requires filing Form 8829.

You can use whichever method results in a lower tax bill and even switch back and forth between the two methods from year to year.

1. The simplified option

With this method of calculating the home office deduction …

• Eligible taxpayers can get a deduction of $5 per square foot of the home used for business — up to a maximum of 300 square feet. For example, if you have a 200-square-foot home office, your deduction would be $1,000 (200 x $5).
• You don’t need to file Form 8829. Instead, you simply report the square footage of your home and applicable deduction, based on the percentage used for business purposes, on Line 30 of Schedule C.

But using the simplified method also has some drawbacks.

• You can’t deduct depreciation of your home for the portion you use for business.
• As with the regular method, your deduction can’t exceed the gross income you derived from the business use of your home, less business expenses. And if it does, you can’t carry any excess deduction over to claim it in the next tax year. The regular method allows for carrying over the deduction for eligible filers.

2. The regular method

With the regular method of calculating the home office deduction, your deduction can’t exceed your gross income derived from your business — same as with the simplified option. But if your deduction exceeds that limitation, you may be able to carry it over and claim it in the next tax year.

The catch is that the regular method is more work than the simplified. It involves adding up the actual expenses of maintaining your home for the year and multiplying the total by the percentage of your home’s total square footage that is used for business.

For example, let’s say you have a 2,000-square-foot home, use 200 square feet for your home office, and have the following home expenses for 2019:

Since you use 10% of your home (2,000 total square feet / 200 home office square feet), your home office deduction using the regular method would be $800 ($8,000 x .10).

The expenses used in the example above are considered “indirect expenses” of your home office, meaning they apply to your entire home. But if you use the regular method to calculate your home office deduction, you can also deduct direct expenses. These are costs that stem directly from the home office, such as repairing the drywall in your home office or having the room painted.

Using the regular method means you’ll have to maintain records of your expenses. But choosing this approach could mean you’re able to deduct more for the business use of your home, including depreciation. And, again, you can carry forward deduction amounts that exceed gross income limitations.

If you choose to calculate your home office deduction using the regular method, you’ll need to complete Form 8829 and attach it, along with Schedule C, to your Form 1040 federal income tax return.

How do I fill out Form 8829?

At first glance, Form 8829 may look daunting, but it’s not that difficult to complete. Here’s a look at the information you need to complete each section.

Part I

This section is used to calculate the percentage of your home used for business. Here’s what you’ll need for Part I.

• The square footage of your entire home
• The square footage used for business

If you run a home-based daycare business, there are a few extra lines to complete. You may need to use a special method to calculate your deduction, too. Check out the IRS Instructions for Form 8829 if you want more information on completing this form for a daycare.

Part II

This section is used to add up your home business expenses (like home office costs) and multiply your indirect expenses by the percentage calculated in Part I.

Direct expenses of maintaining your home office apply only to the portion of your home that you use for business. For example, if you painted or replaced a broken window in your home office, those would be direct expenses.

Indirect expenses apply to the upkeep and operation of your entire home, like the cost of homeowners insurance, utilities and general repairs.

What business expenses are tax deductible?

Generally, an expense must be both ordinary (common and accepted in your trade or business) and necessary (helpful and appropriate for your trade or business) to be considered tax deductible. That means many different types of business expenses could be deductible. For example, if you use your car for business or rent equipment to use in your business, those costs could be deductible.

Part III

This section is used to claim depreciation on your home office. Here’s what you need for Part III.

• Your home’s adjusted basis (what you paid for it, plus the cost of improvements) or fair market value on the date you first started using the home for business, whichever is less.
• The portion of your home’s basis or fair market value allocated to land.

Part IV

Use this section only if your home office deduction is greater than your net income from the business. Part IV is used to calculate any unused expenses that can be carried forward and deducted on next year’s return.

Bottom line

If you’re self-employed and work from home, don’t let the idea of filling out Form 8829 scare you away from taking advantage of the home office deduction. You can always opt for the simplified method if you don’t want to deal with tracking your actual expenses.

Relevant sources: IRS Form 8829, Expenses for Business Use of Your Home (2019) |IRS: Simplified Option for Home Office Deduction | IRS: Credits and Deductions for Individuals | IRS Publication 587, Business Use of Your Home (2019) | IRS: Home Office Deduction | IRS: Tax reform affects if and how taxpayers itemize their deductions | The Tax Cuts and Jobs Act of 2017 Conference Report | IRS Schedule C: Profit or Loss From Business | IRS: Deducting Business Expenses

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent and the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.

This article was fact-checked by our editors and a member of the Credit Karma product specialist team, led by Senior Manager of Operations Christina Taylor.

It’s also vital to understand who may need to make estimated tax payments, and how making them — or failing to make them — could affect your federal income tax obligation.

Let’s look at when quarterly tax payments are due and some other things to know about estimated tax payments.

• What are quarterly tax payments?
• Who should make quarterly tax payments?
• When are quarterly tax payments due?
• How do I make quarterly tax payments?
• What should I do if I miss a quarterly tax payment?

What are quarterly tax payments?

The IRS expects taxpayers to pay their federal income tax obligation and other federal taxes (like alternative minimum tax and Medicare) throughout the year. This happens through payroll withholdings (if you’re a wage-earning employee), by making estimated tax payments or a combination of withholdings and estimated payments.

Estimated tax payments are just that — tax payments you make based on an estimation of what you expect your total tax obligation will be for the year. You estimate your tax due based on your expected adjusted gross income, how much of that income will be taxable, and any deductions or credits you may be eligible for. The IRS says you can use your previous year’s return as a guide.

If you make estimated tax payments, you do so on a quarterly basis.

Who should make quarterly tax payments?

Generally, if you expect to owe $1,000 or more of federal income tax when you file your return, you should make estimated tax payments, the IRS says.

Many situations could leave you owing a big chunk of income tax. Here are a few examples.

• You’re self-employed so you don’t have an employer withhold taxes for you throughout the year.
• You receive income from interest, dividends or capital gains.
• You’re retired and receive distributions from an IRA.
• You had a large, unexpected windfall, such as a prize or award.

Making estimated tax payments could help ensure you don’t end up owing a lot of tax — and possibly penalties and interest for underpaying come Tax Day. And if you wind up overpaying your tax obligation because of your estimated tax payments, you might even get a refund.

Keep in mind that some people are required to make estimated tax payments, and making them late could mean facing a penalty — even when owed a refund.

When are quarterly tax payments due?

Generally, estimated tax payments are due on these dates, according to the IRS.

If the due date falls on a Saturday, Sunday or legal holiday, the estimated payment is due on the next business day.

This article focuses on quarterly estimated tax payments for individuals, partners in a partnership, members of a limited liability company, and shareholders in an S-corp. Different due dates apply to fiscal year taxpayers (meaning your tax year doesn’t start on Jan. 1), farmers, fishermen and corporations. Fiscal year taxpayers, farmers and fishers can find more information about estimated payments in Publication 505. Corporations can find more information about making quarterly installments in Publication 542.

How do I make quarterly tax payments?

IRS Form 1040-ES includes an Estimated Tax Worksheet to help you calculate your total estimated tax for the year and break that total down into the quarterly estimates required.

To complete the worksheet, you’ll need to know your estimated adjusted gross income for the year, whether you’ll itemize deductions or claim the standard deduction, and the amount of any credits you’re eligible to take.

Once you’ve calculated the amount you need to pay, you have a few options for making your payment.

Pay via check or money order

Form 1040-ES has payment vouchers to include with a check or money order if you prefer to make your payment by mail. The form also includes the address to mail your check, depending on your state of residence.

You should make your check, money order or cashier’s check payable to U.S. Treasury. To ensure your payment gets applied to the correct taxpayer account, the IRS recommends including the following information on your check:

• Your name, address and daytime phone number
• Your Social Security number or employer identification number
• The tax year to which the payment applies
• The related tax form or notice number for an estimated tax payment (for example, Form 1040-ES)

Pay with cash

You should never mail cash with an estimated tax voucher. But if you prefer to pay with cash, the IRS partners with certain retailers to accept cash payments. Just be aware that there is a $1,000-per-day transaction limit and it takes five to seven days to process your payment using this method, so make your quarterly tax payment well in advance of the due date. Visit OfficialPayments.com/fed to find a local participating location and follow the instructions to make a cash payment.

Pay online using your bank account

The IRS allows taxpayers to pay their taxes, including quarterly estimates, directly from a checking or savings account using its free Direct Pay service.

When you use Direct Pay, you can make a same-day payment. But payments submitted after 8 p.m. Eastern time will be processed the next business day, so plan ahead to make sure your payment is processed on time to avoid penalties.

Pay by credit card, debit card or digital wallet

The IRS doesn’t accept credit card, debit card or digital wallet payments directly, but it does work with third-party payment processors that accept most cards and digital wallet options.

Keep in mind that these payment processors charge a fee, which varies depending on the service provider and payment method. You can find a schedule of fees and links to make a payment here.

What should I do if I miss a quarterly tax payment?

If you don’t pay enough tax via withholding or estimated quarterly payments, or if you make your quarterly tax payments late, you may have to pay a penalty — even if you’re due a refund once you file your tax return. This is because the IRS says you should make estimated tax payments in four equal amounts. Then it calculates a penalty separately for each required installment.

If you miss a payment deadline, your best bet is probably to make the payment as soon as you can. You may also be able to request that the IRS waive the penalty if you missed your payment for one of these reasons.

• You experienced a casualty event, disaster or other circumstances beyond your control. The IRS says a casualty is damage, destruction or loss of property due to an unexpected, sudden and unusual — but identifiable — event.
• You’re 62 or older and retired from working, or you become disabled during the year, and you had a reason for the underpayment rather than willfully neglecting to make the payment.

The Instructions for Form 2210 include information on requesting a waiver of the estimated tax penalty.

Bottom line

Paying taxes every quarter instead of once per year may seem like a huge headache, but it’s one way to ensure you’re paying in enough money throughout the year to avoid a huge tax bill you can’t afford to pay at tax time. And depending on your circumstances, the IRS may require you to make estimated tax payments.

Also, the IRS may not be the only agency that expects to receive quarterly tax payments from you. Each state makes its own tax rules, so check with your state’s taxing authority to see whether you need to make estimated quarterly payments to your state as well.

Relevant sources: IRS FAQs: When are quarterly estimated tax payments due? | IRS: Estimated Taxes | IRS Self-Employed Individuals Tax Center | IRS Publication 505: Tax Withholding and Estimated Tax | IRS publication 542: Corporations | IRS Form 1040-ES, Estimated Tax for Individuals | IRS: Pay by Check or Money Order | IRS: Pay with Cash at a Retail Partner | IRS: Direct Pay with Bank Account | IRS: Additional Information on IRS Direct Pay | IRS: Pay Your Taxes by Debit or Credit Card | IRS: Common Penalties for Individuals | IRS Topic No. 36: Penalty for Underpayment of Estimated Tax | IRS Publication 547: Casualties, Disasters and Thefts

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent and the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.