What Is SoFi?
In this SoFi review we will take a look at what SoFi offers and the pros and cons of Sofit.
SoFi, like most other niche financial services companies is expanding. It turns out that once you get a foothold, and a few developers working full-time for you, cranking out “disruptive” finance services is easy.
First, SoFi was a lender. If you scroll to the bottom of their webpage, you’ll see in the fine print that officially, SoFi (the lending part) is SoFi Lending Corp. NMLS #1121636. You see, lending corporations are real things that exist and are also heavily regulated.
Believe it or not, there is no need, nor requirement to be a bank to give out loans. It just means you have to get the money you are going to lend out to people from somewhere besides customer bank deposits. In this case, SoFi investors supply the money the company lends out.
At this stage, SoFi focuses on just a few lending products. SoFi offers student loans, personal loans, and mortgages. No car loans, credit cards, or home equity loans or lines are offered.
SoFi Home Loans Review
SoFi mortgages offer low down payments with as little as 5% down mortgages, or 10% down, depending on which webpage you are on. Of course, you have to qualify for the low-down payment, and you have to pay PMI (Private Mortgage Insurance) each month while your mortgage has a loan-to-value ratio above 80%. SoFi offers standard 30-year fixed and 15-year fixed mortgages as well as a 20-year fixed mortgage and even a 10-year fixed mortgage.
Are SoFi mortgages a scam?
SoFi mortgages are legit. Like any lender there is fine print. SoFi mortgages have low rates, or more specifically “competitive rates.” What that means is up to the company and depends upon you and your credit score. The big print says SoFi member save $500 on your mortgage or refinance processing fees. The fine print says you MAY qualify for a discount on mortgage fees.
As far as mortgages are concerned, SoFi only originates mortgage loans in 42 states an the District of Columbia (Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, Washington, D.C., Wisconsin, and Wyoming).
Better Mortgage Deals? Pros and Cons of SoFi Home Loans
Where SoFi looks really interesting is the mortgages they offer. For starters, they advertise the ability to get a mortgage with 5 or 10 percent down. That could be huge for a lot of people, who don’t have a full 20% down payment. However, it is only for those who are, “well-qualified applicants.” In other words, if you have good credit, a solid employment history, and aren’t going over your debt-to-income ratios, you might be in business.
They also say that there are no application fees or origination fees which is also a good deal. Don’t confuse this with closing costs though, which they do have, and which the company only has limited control over.
SoFi Mortgage Refinancing
SoFi can also refinance your existing mortgage whether you just want to get a lower rate, or move to a mortgage with a different term. You can refinance with up to 90% LTV (the equivalent of a 10% down payment). You can get a cash-out refi up to 80% LTV. Again you may get a discount on your closing costs/fees as a SoFi member.
After companies like Robinhood and Stash started getting a bit of attention, if not profits, other finance companies started jumping into the ring as well. Is SoFi legit? The SIPC says so.
SoFi is more than a lender, it’s also an advisory firm, known legally as “SoFi Finance, LLC, an SEC Registered Investment Advisor,” and also a brokerage called, “SoFi Securities LLC, and affiliated broker-dealer registered with the Securities and Exchange Commission.” (SoFi, does take brokerage deposits, but not banking deposits.)
SoFi Invest Review
Like most of the new mini-brokers SoFi offers an investing app with no commissions. This used to be a differentiator, but these days, many traditional discount brokers are no commission as well. Investing by app makes it seem easier and faster than having to log into a computer, although the process is the same.
The key feature of mini-brokers is the ability to by partial shares, known as fractional shares of companies. In other words, you can invest in stocks even if you don’t want to invest enough to buy a whole share. SoFi calls its fractional shares Stock Bits. Stock Bits are essentially an internal account mechanism that assigns you a partial share. You get partial dividend, and partial stock splits, and so on. You do not get a partial vote, although most SoFi investors won’t miss that. Not all stocks are allowed to be bought as Stock Bits.
You can buy stock bits by dollar amount rather than share amount. In other words, you can buy $200 of GM invest exactly $200, rather than having to buy 4 shares at $53, for example, and ending up with an investment of $212. Unlike regular, full-share, stock trades, Stock Bits trades are only executed once per day around market close, which means your stock price may have changed since you entered your partial share trade. For this reason, there are no limit orders allowed on Stock Bits.
In addition to stocks, you can buy ETFs on SoFi. SoFi even has its own branded SoFi ETFs.
SoFi Invest accounts do not automatically reinvest dividends by default. If you want to reinvest your dividends, you need to specify in your account.
SoFi Automated Investing Review
As I often mention here on Finance Gourmet, the best long-term investing strategy is a well-diversified portfolio tailored to your goals and risk tolerance. To this end, or for those who just don’t want to pick their own investments, SoFi offers automated investing. SoFi automated investing is a glorified robo-advisor that invests your money into a portfolio of ETFs, including some proprietary ETFs.
The automated investing at SoFi automatically rebalances your account via additional contributions. In other words, each contribution is automatically allocated such that it restores your portfolio closer to the original portfolio allocation. If a portfolio drifts by more than 5%, then the portfolio will be automatically rebalanced by buying and selling the necessary ETFs.
The greatest pro of SoFi Automated Investing is a 0% management fee, and no minimum investment. However, its competitors such as Wealthfront and Betterment charge just 0.25%. The difference will be minimal for accounts without larger balances. As always, account holders will pay the cost of the ETFs themselves. SoFi also charges $75 for closing an account.
The greatest con of SoFi Automated Investing is that it does not offer tax-loss harvesting. However, this is only relevant to non-IRA accounts.
In addition to automatic rebalancing, SoFi automated investing supports automatic investments. Automatic investments are limited to $1,000 when coming from an external account (via ACH). Larger amounts, up to $50,000 are allowed if the money is coming from a SoFi Money banking account.
SoFi IRA Review
SoFi’s IRAs pair well with its automated investing program, allowing investors to start with any amount and then continue contributing to their IRAs while letting someone else handle the investing. Of course, SoFi IRAs can also be self-traded, and are eligible for Stock Bits to purchase fractional shares.
SoFi Roth IRA
SoFi Traditional IRA
SoFi also offers traditional IRAs, as well as SEP-IRAs for business IRA plans.
What Makes SoFi Different?
It is really hard to be different structurally in the financial services industry. That is by design. Finance is heavily regulated, and for good reason. The legal structure of SoFi is the same as any bank that runs a lending company, advisory company, and brokerage company under the same name.
For the most part, it’s the usual stuff that all banks say make them different. They care more. They have better rates. They have better customer service. You know, all the same stuff all the banks say that makes them better than other banks. You would have to actually open an account to verify the veracity of those kinds of statements.
Not Using FICO Scores
Update: I no longer see the company claiming it does not use FICO scores. I will investigate and update this section.
The one thing that is potentially different, is that the company claims to not use FICO scores. The company markets this as the FICO Free Zone. Instead of using a FICO score, they will look at your whole situation and make a credit determination based on their own analysis, rather than a mathematical score calculated by a computer. Ironically, this is not revolutionary. Instead, this is how they used to do credit in the old days before FICO scores existed.
A bank loan officer would look at all of you papers, and statements, and tax returns, and so on, as well as your reputation in the community and then determine whether or not to give you a loan, and at what interest rate. This, is where banks became the primary lenders. Not only did they have the money, but if you were a customer, they already knew something about you, like how much you have in the bank, and how often you bounce checks, without even looking at a credit report. As far, as I can tell, SoFi still uses your credit report, they just don’t use the FICO score. (Note that the company discloses that it does pull your FICO score and keeps it up to date in their records because their investors might want to know.)
This doesn’t mean that they dish out loans blind to anyone regardless of how bad their credit history is. It just means that they use their own manual criteria rather than use a FICO score. Whether they are more or less lenient in their lending is something you have to take their word for.
Low Rates Cheaper Fees
SoFi does seem to offer lower rates and fees than you’ll typically find if you go into a financial company blind. That is, if you contact a bank or lender without ever having a relationship with them. On the other hand, if you have a hometown credit union that waives fees and gives low rates to existing clients that use other products (like the banking services) then, you might be able to match what SoFi offers.