You usually can't use a personal loan to fund the down payment on a home. There are many alternatives to making a 20% down payment, which can help you buy a house without making a sizeable down payment.
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When you purchase a house, your lender will most likely expect that you make a down payment on the home. This is important for a few reasons. One is that the down payment reduces the amount that you have to borrow, which makes the loan cheaper overall. Second, making a large enough down payment helps you avoid private mortgage insurance (PMI) payments.
If you don’t have the cash to make a down payment, you might be thinking about other ways to afford it, such as borrowing money with a personal loan. However, most mortgage lenders won’t let you fund your down payment with a personal loan.
Even if you find a mortgage lender that accepts down payments funded with personal loans, using this strategy probably isn’t the best idea. If you need help getting a mortgage and affording a down payment, these tips can help.
On this page:
- Can you get a personal loan for a down payment on a house?
- Pros & cons of using a personal loan for a home down payment
- How to find a personal loan for a down payment
- Alternative down payment loan options
- Mortgages that don’t require a down payment
Can you get a personal loan for a down payment on a house?
When you apply for a mortgage, your lender will typically go through your credit report with a fine-toothed comb. Homes are expensive, and lenders want to feel confident that you’ll repay the loan, so they want to see every aspect of your credit history before approving you.
One thing that lenders look at carefully is your other debt, specifically your debt-to-income (DTI) ratio. If you have a high DTI ratio, it makes you a riskier borrower in the lender’s eyes. Having a lot of debt can lead a lender to deny your application.
Because personal loans add to your debt and DTI, most lenders don’t like it when people borrow money to make a down payment. Loans with down payments financed through personal loans also aren’t approved by Fannie Mae, a federal mortgage backer.
If you manage to find a lender that will let you use a loan for your down payment, you’ll probably have to get both your mortgage and the down payment loan from the same lender. Sometimes, instead of a personal loan, you use a piggyback home equity loan to finance your down payment.
Pros & cons of using a personal loan for a home down payment
- You don’t have to save for a down payment. One benefit of borrowing your down payment is that you don’t have to spend time setting aside extra money, making it easier to buy a home.
- Use your money for other purposes. If you don’t have to set aside money or pay a large down payment, you can use your savings for other things, like investing, which can offer a good return in the long term.
- Personal loans can be expensive. Personal loans are unsecured loans, which means they typically have higher rates than other types of debt, making this a costly way to finance a down payment, especially if you have less than perfect credit.
- Limited options. Most mortgage lenders won’t let you make a down payment with a personal loan, limiting your options when comparing lenders.
- Additional monthly payment. Getting a personal loan to make a down payment means you’ll have to make a monthly mortgage payment and a monthly personal loan payment, adding strain to your budget.
How to find a personal loan for a down payment
If you find a mortgage lender that is willing to let you use a personal loan to make a down payment, you should take the time to shop around for the best deal. Our guide to the best personal loans is a great place to start.
When you’re comparing personal loans, these are some of the factors you should be considering.
- Rates. The interest rate determines the overall cost of the loan and the size of the monthly payments—the lower the interest rate, the better.
- Origination fees. Some lenders charge origination fees for personal loans. These fees reduce the amount you receive or increase the loan’s initial balance, so you want to avoid this fee whenever possible.
- Loan terms. The term of a loan is how long it will take to repay it by following the minimum payment schedule. Longer terms mean low monthly payments but a higher overall cost. In comparison, shorter terms mean high monthly payments but lower total costs. Different lenders have different term options, so choose one that works for you.
- Discounts. Some lenders will give you a discount on personal loans if you have taken out a loan with them in the past or have a bank account with them.
- Prepayment penalties. Some lenders charge a fee if you pay your loan off ahead of schedule. If you want to do that, make sure to avoid loans with this fee.
- Minimum credit score. Each lender has its requirements for qualifying for a loan. Make sure that you have a chance of getting a loan from a lender before you apply.
If you’re looking for a personal loan, we have guides that can help people with any quality of credit find a lender. Check out our guides to:
Alternative down payment loan options
If you don’t want to use a personal loan for a down payment or can’t find a lender that accepts this method, you have a few other options.
- Down payment assistance programs. There are many mortgage programs designed to help people make a down payment on a new home. For example, Boston, MA, offers down payment assistance to those buying homes in the city. Check your local area for assistance programs and organizations.
- 401(k) loan. If you have a 401(k) retirement plan, you can borrow money from it to help cover a down payment. Borrowing from a retirement account is dangerous for many reasons. One of which includes leaving yourself with less money for retirement.
- Piggyback loan. These loans attach a home equity loan to your mortgage, letting you augment your down payment with the money you get from the home equity loan. You wind up with two monthly payments but can avoid things like PMI with this option.
- Home equity loan or HELOC. If you already own property, you can use some of the equity you’ve built in that property to buy a new one. Check out our guide to using a home equity loan or HELOC to purchase another house.
- Family or friend loan. If you have friends or family that are willing to lend money to you, you may borrow money from them to make a down payment. Make sure to outline the terms of the loan so that repayment doesn’t create tension between your friend or family member and yourself.
- Save up. You can always save money over time to cover your down payment. Set aside some money in a savings account every month, and you’ll quickly build a balance you can use to make a down payment.
Mortgages that don’t require a down payment
Another way to get around the need to save for a down payment is to get a mortgage with a reduced or no down payment requirement. There are a few different options out there.
- FHA loan. Federal Housing Administration (FHA) loans are a type of loan that first-time homebuyers can use to finance their purchase. Unlike conventional loans, these loans only require a down payment of 3.5% and a credit score of at least 580. The drawback of FHA loans is that you may have to pay private mortgage insurance (PMI) for the loan’s full life. See our picks for the best FHA loans.
- VA loan. If you’re a veteran, you can qualify for a loan from the U.S. Department of Veterans Affairs. These Veterans Affairs loans (VA loans) have no down payment requirements and can be easier to qualify for than conventional loans. You also don’t have to pay PMI, even if you make a small or no down payment. The drawbacks are that you have to be a veteran to qualify and that not making a down payment means you’ll pay more interest. See our picks for the best VA loans.
- USDA loan. The US Department of Agriculture (USDA) has a loan program with no down payment requirements and lets you include closing costs in the mortgage, meaning you can buy a home with almost no savings required. The drawbacks are that you must pay PMI and generally only buy a home in a rural area. You’ll also pay more in interest because you’ll have to borrow a more considerable amount than if you made a down payment.
- A conventional mortgage with lower down payment and PMI. You can always apply for a conventional loan and make whatever down payment you’re able to make. Many lenders will accept down payments less than 20%, but if you can’t pay the full 20%, you’ll have to pay private mortgage insurance (PMI). PMI protects your lender if you fail to repay the loan, but the cost increases your monthly housing payment. PMI usually costs between 0.5% and 1% of the loan amount each year. Once you reach a loan to value (LTV) of 78%, you can usually get PMI removed from your loan, which will reduce your payment. See our picks for the best mortgage lenders.
Author: TJ Porter