Can You Use a Personal Loan To Buy a House?

If you want to buy a house, you may be wondering whether it’s possible to take out a personal loan and use the funds as a down payment to buy a house? We will provide you with everything you need to know about using personal loans to buy a home.

Can You Use a Personal Loan To Buy a House?

Although it may be possible to buy a home using a personal loan as a down payment, many mortgage lenders do not allow personal loan funds to be used as a down payment for a home. This is so because using a personal loan as a down payment raises red flags for lenders as to your ability to afford the home you’re seeking to buy.

Don’t plan on hiding the source of funding for your down payment as you are required to disclose the source of your down payment by providing bank statements that show the source of your money.

Using a personal loan as a downpayment should be a last resort option and should only be used if you’re confident that you can pay back the personal loan in a short period of time.

Before using a personal loan as a downpayment to buy a house, you should consider your ability to make payments on the personal loan as well as the payment on your home mortgage. Personal loans are typically expensive and must be paid off within a short period of time, such as two or five years vs the thirty years you have to pay off a home loan.

Since personal loans must be paid off in a shorter period of time, they typically require higher monthly payments than mortgages where payments are significantly lower since they’re spread across a lengthier time period.

Additionally, personal loans charge a high interest rate since there is nothing securing the loan. So, lenders charge more interest since they’re taking a bigger risk by lending you the money, making them a bad option to use to buy a home.

How To Get a Personal Loan To Buy a Home?

While some lenders will not allow you to use personal loan funds to buy a home, and we discourage their use to buy a house, if you are dead set on using a personal loan as a downpayment to buy a home, you can shop around for personal loans. There are a ton of reputable lenders that offer you the ability to take out a personal loan.

Shop around for the best loan terms and interest rates as they vary greatly among the available personal loan lenders. Most major banks provide personal loans, with credit unions and online lenders often offering the best and most competitive interest rates on such loans.

You should look for a lender that charges the lowest interest rates in order to get the lowest monthly payments to make paying off your personal loan and mortgage as manageable as possible.

Before even applying for a personal loan, you should consider whether your income is enough to make payments on your existing debts, your personal loan, and your mortgage.

If you can afford to comfortably make all of your payments on time, then it makes sense to proceed. However, if your income is insufficient to do so, you should consider holding off on buying your home.

Consider Alternatives To Using a Personal Loan To Buy a Home

If you’re considering taking out a personal loan to buy a home, here are some alternatives that you should consider before applying for a personal loan.

Alternative #1: Use an FHA Loan

If you don’t have enough funds for a 20% downpayment on a home, you should consider an FHA Loan. With an FHA home loan, you’re only required to make a downpayment of only 3.5% so long as you have a credit score of 580 or higher. So, this could be a great alternative to taking out a personal loan to buy a house. That said, you should keep in mind that if your downpayment is less than 10% of the home’s price, you will be required to buy mortgage insurance, protecting the lender in the event that you default on the loan. That said, if you’re interested in an FHA loan, you should check the entire list of requirements for qualifying for such a home loan.

Alternative #2: Consider a VA Loan

If you’re a veteran and you’re looking for options to buy a home, you should consider taking out a VA loan. VA loans are available to veterans, those on active duty, or an eligible surviving spouse of a veteran. These loans are very affordable, require little in terms of downpayment, and do not require mortgage insurance as do FHA Loans. So, consider them if you meet the requirements for them.

Alternative #3: Consider an Alternative Lender

If you want to take out a mortgage to buy a home and are having difficulty securing sufficient funds for a down payment, you should consider seeking alternative lenders that require a low or no downpayment. There are many banks out there that offer zero or low downpayments for mortgages. Some of these lenders include Bank of America, Quicken Loans, SoFi, Suntrust, and PNC Mortgage. That said, even though you might qualify for a low downpayment mortgage, you should keep in mind that such options will be more expensive since you’re putting little money towards buying a home. So, make sure you have the funds necessary to comfortably afford your monthly payment.

Alternative #4: Take a Loan From Family or Close Friends

If you want money for a downpayment on a new home, you should consider asking family or close friends for money for a downpayment instead of taking out a personal loan. Ask someone close like your dad, mom, brother, sister, or close friend for money. It may be tricky asking them for money, but it beats using a personal loan. When you take money from family or friends, paying off the loan is easier than sticking to a strict monthly schedule that comes with personal loans. You have more freedom paying it off.

Alternative #5: Consider a Downpayment Assistance Program

Downpayment assistance programs are a great alternative to using personal loans to buy a home. DPAs provide homebuyers with grants or low-interest loans to assist them with buying a home. The United States has over 2000 programs to help homebuyers afford to buy a home. Search for a down payment assistance program in your State and you will be surprised with the options that may be available to you.

Alternative #6: Save Up Money

If you are in no rush to buy a home, it may be worth it to keep working and save up some money to buy a home. If you are married, it could be worth it to ask your significant other to work and help you save money to buy a home. Also, if you have a lot of stuff lying around, try selling it to save some money for a home. If you have any skills, you should consider freelancing to earn some extra income to buy a home. The internet is full of opportunities for you to earn some extra money to save for the downpayment for a home.

Does Taking Out a Personal Loan To Buy a Home Affect Your Credit?

Before taking out a personal loan to buy a house, you should consider the impact that it has on your credit. If you want to buy a home, you should do everything possible to maintain the best credit score for when you apply for a mortgage. This is so because your credit score impacts whether you’ll be approved for a loan, the terms of the loan, and the interest rate on the loan.

Taking out a personal loan does affect your credit. First, when you apply for a personal loan, a hard inquiry is placed on your credit report, slightly lowering your credit score. Although a single hard inquiry does not have a significant impact on your credit score, if you submit too many personal loan applications, you could cause a significant drop in your credit score due to the hard inquiries that will be placed on your credit report.

Second, when taking out a personal loan, you should ensure that you’re able to make the monthly payments on the loan because missing even a single payment on your personal loan may result in a late payment notation added to your credit report. Having a late payment on your credit report could make it very difficult to be approved for a home loan.

So, these are some things to consider before applying for a personal loan to use as a down payment for a home.

Why Using a Personal Loan as a Downpayment For a Home May Be a Bad Idea

Here are some of the disadvantages of using a personal loan as a downpayment for a new home:

Disadvantage #1: Limits Your Loan Options

The first disadvantage of taking out a personal loan to use as a downpayment for a home is that it limits your loan options as some lenders will not allow you to use personal loan funds as a downpayment. Lenders will ask you about the source of the money and lying on the application could get you denied.

Disadvantage #2: There Are Other Options

The second disadvantage is that there are less expensive alternatives available to you instead of taking out a high interest rate personal loan to use as a downpayment. Most people will tell you that you need at least a 20% downpayment to buy a home, but the reality is that you may be able to buy a home with as little as a 3% downpayment.

Disadvantage #3: Lower Credit Score

Taking out a personal loan right before you buy a home can be a bad idea as it may lower your credit score because of the hard inquiry that’s placed on your credit report. Also, missing a payment on a personal loan could cause significant damage to your credit. This is something that you want to avoid right before you apply for a home mortgage.

Disadvantage #4: It Makes Buying a Home Expensive

Personal loans must be repaid within a very short period of time, such as 1, 2, 3, or 5 years. So, your payments will be very high, especially if you include the amount of money that you need to pay for your mortgage. You should only use a personal loan as a last resort, and if you’re sure that you can handle the mortgage and personal loan payment.

The Bottom Line

Although some lenders may allow you to use a personal loan as a downpayment to buy a house, you should avoid using them because they are expensive and some lenders will not be willing to work with you. If you have any general questions or comments, please feel free to leave them in the comments section below.