Can You Get a Personal Loan for a Down Payment on a House?
The flexibility of a personal loan may make it seem like a good option for funding a down payment on a house, but that’s not always the case. Taking out a personal loan when trying to buy a home can create both short- and long-term problems.
Buying a house is a major financial commitment, one that often requires years of saving and planning. Although this long-term arrangement may not be right for everyone, for some, buying makes more sense than renting.
Buying a house is often a good option if you are confident about your long-term career trajectory and plan to stay in one place for at least five years, the amount of time it typically takes to begin to build significant home equity. In addition, it’s also best to have savings available to afford a down payment, especially if you’re considering conventional loans.
If your down payment is less than 20% of the value of the house, you’ll usually be required to purchase private mortgage insurance, (PMI), which means a higher monthly payment. As a result, some homebuyers consider getting a personal loan to give them the cash needed for a down payment and closing costs.
How to Use a Personal Loan for a Down Payment on a House
In theory, a personal loan, which can be used for many purposes, may seem like a feasible way to help you secure a down payment on a house. Although this is technically allowed, taking out a personal loan so close to your mortgage application could be a major red flag to potential lenders — and could prevent you from getting approved for a mortgage, even if you’ve already been pre-qualified.
If you do, however, decide to use a personal loan for a down payment, it’s important to find the most affordable option. In most cases, you’ll want to take out a personal loan well before you submit a mortgage application so that the credit inquiry isn’t recent.
Down Payment Loan Options
If you’re considering a personal loan, there are several options available. The below lenders offer fixed-rate loans, no origination fees, and a simple online application.
With APRs from 3.99% to 16.99% with autopay, a personal loan through LightStream is one of the most affordable options on the market. Repayment terms range from two to 12 years for loan amounts between $5,000 and $100,000. There are no origination fees, and funding can happen as soon as the same day. This lender is best for borrowers with excellent credit.
Citizens Bank offers personal loans of $5,000 to $50,000 with APRs ranging from 7.84% to 20.92%. Repayment terms are anywhere from three to seven years. There are no origination fees, and funds are generally available within three days. Often noted for its stellar customer service, this Citizen Bank is a good option for borrowers who want to work with a traditional bank.
Marcus by Goldman Sachs
Marcus originates personal loans between $3,500 and $40,000 with APRs as low as 5.99%. Loan terms range between three and six years, and there are no origination fees. Typically, funds are available in as little as one to four business days. Marcus allows borrowers to choose their monthly payment, making it easier for you to customize a loan that fits in your budget.
Benefits of a Down Payment Loan
On the surface, a personal loan can help you afford enough of a down payment so that you can avoid paying PMI. The money may also help you qualify for the home or specific mortgage product you want.
>> Read More: Best personal loans
Further, applying for a personal loan is fairly quick and easy, and interest rates are generally lower than what you’d face when taking a cash advance from a credit card.
Downsides of a Down Payment Loan
Mortgage underwriting is an intense process that requires a deep dive into your personal finances. In most cases, a personal loan will act as a red flag, signaling that you may not be ready to take on a home loan. Here are a few reasons why that could be the case:
- Lenders look for “seasoned” money, or funds that have been in your bank account for a certain length of time to demonstrate a history of savings. Ideally, the funds will have been there for at least two to three months to be considered sufficient to use toward a down payment. Depending on when you take out a personal loan, the funds may not qualify as “seasoned.”
- Because a personal loan will result in a hard credit inquiry and an increase in your total debt obligations, it will likely lead to a temporarily lower credit score and/or a higher debt-to-income ratio. This can make it hard to secure the best rates on a mortgage loan — and can even prevent you from getting a mortgage in the first place.
- If you are able to secure a mortgage, the additional burden of a personal loan can make managing your monthly budget a struggle and put your home at risk.
Alternatives to Down Payment Loans
If you don’t have enough money for a substantial down payment, there are few other options worth considering.
FHA loans are designed primarily for first-time homebuyers who would otherwise not meet the credit or income requirements of a conventional mortgage. In this case, you’ll only need to put down a 3.5 percent down payment, but PMI will be required if you put less than 10 percent down on an FHA mortgage.
Though mortgages have traditionally been obtained through banks and mortgage brokers, today’s online lending marketplace has paved the way for alternative mortgage lenders, many of which have looser eligibility requirements, particularly when it comes to a down payment.
If you’re considering an alternative lender, you may want to look to companies like Rocket Mortgage, SoFi, and SunTrust. However, keep in mind that low down payments may result in higher mortgage rates.
The U.S. Department of Agriculture mortgage program provides $0 down payment mortgages to certain U.S. citizens. Qualifications vary based on location, but typically you must be purchasing a home in an approved suburban or rural areas and meet income and household size requirements.
The VA loan is another $0 down payment mortgage option available to veterans, service members, and some military spouses. VA loans are issued by private lenders and guaranteed by the U.S. Department of Veterans Affairs.
Friends and Family
You may be able to secure help from family members or friends for down payment assistance in the form of a gift.
If your situation doesn’t require an immediate purchase, sometimes the best choice is to wait and save for a house down payment. This may not be the most attractive option, but it can help you secure better rates and more affordable monthly mortgage payments when the time comes.
Personal loans are often considered one of the most flexible loans available to consumers. Although there are a lot of ways you can use the funds, you may want to think twice about using a personal loan to help facilitate your home purchase.
A personal loan can serve as a red flag, leaving lenders hesitant to approve your mortgage. At best, you’re likely to face long-term financial stress as you try to manage the monthly payments of both a personal loan and a new mortgage.
If your lender isn’t willing to budge at all on the 20 percent down payment requirement, it might be better to consider another type of loan that allows for a smaller down payment. Alternatively, it might be better to wait a little longer to purchase a home so that you can save more for the down payment or consider a lower-priced home.
Author: Jennifer Lobb
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