Can You Use a Personal Loan for a Down Payment on a House?

Getting a personal loan to help fund a down payment on a house might seem like a good idea, but most lenders don’t allow it. Lenders prefer your down payment to come from your savings, though financial gifts from family are acceptable, too, if you provide documentation.

If you don’t have the cash for a down payment or family members willing to help, there are other ways to fund it, which we’ve listed below. These options have pros and cons, which we explain in this article. We also share information on mortgages that don’t require down payments at all.

Can you use a personal loan for a down payment on a house?

You can use a personal loan for almost anything. However, most mortgage lenders don’t allow borrowers to use personal loans to fund down payments. For example, two of the most popular mortgage options—conforming conventional loans and FHA loans—don’t allow personal loans for down payments.

Our expert’s take

Erin Kinkade

CFP®

Lenders won’t initially know you used a personal loan for the down payment if you don’t disclose that or haven’t yet applied for the personal loan. If your financial statements reflect insufficient savings for the down payment, this would be an indicator to ask how you intend to fund the down payment. Proof of funds is required during underwriting, and so is a credit check, so the discovery would occur during underwriting. If it’s somehow not discovered at this time, or if you apply for a personal loan after the mortgage is approved, the lender will likely discover it prior to closing on the mortgage. Be transparent and honest with the lender to avoid surprises while waiting for final approval.

Risks of using a personal loan for a down payment

Even if you find a lender that allows it, there are risks if you use a personal loan for your down payment. First, getting one can hurt your approval odds because it increases your debt-to-income ratio (DTI). Your DTI is one of the factors lenders review when deciding whether or not to approve you for a mortgage. 

A high DTI indicates a higher level of risk to a lender. As such, your lender may deny the application due to financial instability or charge a higher interest rate if the ratio is too high. Fortunately, a personal loan isn’t your only option. There are other ways to afford a down payment if you don’t have sufficient savings. 

Situations where a personal loan might be allowed

The only situation where a personal loan might be permitted as funding for a down payment is if you use a private lender or get a seller-financed mortgage. Because these lenders operate outside the bounds of traditional, conventional mortgages, the lending requirements may be less stringent. 

However, this option would be on a case-by-case basis and vary depending on your lender.

There are other options to fund a down payment without a personal loan if you don’t have the savings, including getting a mortgage that doesn’t require a down payment or using another financing method. Here are the top choices to consider.

Mortgages that require no down payment (or a small percentage)

Some types of mortgages don’t require a down payment—or if they do, it can be less than a conventional mortgage requires. You can avoid saving or borrowing money for a down payment with the following options. 

Click the option in the table to read more about its down-payment requirements.

Option	Down payment required	Eligibility requirements
FHA loan	3.5%	First-time homebuyers
VA loan	None	Armed services veterans
USDA loan	None	Buy a home in a rural area
Mortgages with PMI	5% (for many conventional mortgages)	Depends on the lender, but the borrower, if approved, must make a PMI payment monthly until they meet specific criteria

FHA loan

Federal Housing Administration (FHA) loans are for first-time homebuyers. The loans are guaranteed by the federal government and intended to help homebuyers purchase properties. Unlike conventional loans, these loans only require a down payment of 3.5% and a credit score of at least 580.

However, FHA loans may require an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). Both premiums add to the cost of the loan. Depending on your finances, an FHA loan might make sense. Check out the top FHA lenders.

VA loan

If you’re a veteran, you can qualify for a loan from the U.S. Department of Veterans Affairs. These Veterans Affairs (VA) loans have no down payment requirements. Qualification requirements might be less strict than conventional loans. There’s also no PMI, regardless of how much you put down. 

However, the loans are only available for veterans, which makes it an unattainable option for most homebuyers. But if you meet the eligibility requirements, VA loans can be an excellent option. See which lenders offer the best VA loans.

USDA loan

The U.S. Department of Agriculture (USDA) has a loan program with no down payment requirements that lets you include closing costs in the mortgage. As a result, you can buy a home with almost no savings. 

However, you must buy in a rural area and pay an annual guarantee fee (the USDA’s version of PMI). Your loan amount will be higher without a down payment, which means higher interest charges. 

Mortgages with private mortgage insurance (PMI)

You can apply for a conventional loan and make whatever size down payment you can. Many lenders will accept down payments of less than 20%. But if you can’t pay 20%, you must pay PMI. 

PMI protects your lender if you fail to repay the loan, but the cost increases your monthly housing payment. PMI often costs between 0.5% and 1% of the loan amount each year. Once you reach a loan-to-value (LTV) of 78%, you can often get PMI removed from your loan, reducing your payment. Find the best mortgage lenders.

Our expert’s take on this option

Erin Kinkade

CFP®

Choosing this option depends on whether the home purchase is a need versus want and whether the PMI is affordable. PMI is typically not an economic benefit when analyzing the total payments over the lifetime of the mortgage, but it may be the only option a borrower has.

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, consider the following.

Click the alternative listed in the table to read more about it.

Alternative	Best for
Down-payment assistance programs	First-time buyers
Save more	Buyers with flexible timelines
Family or friend loan	Good communicators
401(k) loan* or IRA withdrawal	Younger homebuyers with eligible plans
Home equity loan or HELOC	Buyers with additional properties
Piggyback loan	Financially organized buyers

Down-payment assistance programs

Many states offer down-payment assistance programs for first-time homebuyers. The qualification requirements and specifics of each program vary by state. The U.S. Department of Housing and Urban Development has a complete list of programs by state.

Some programs offer free grants and additional loans that can help fund your down payment. Research options in your state and check whether you qualify. Each program will have different requirements, but here are some examples:

• Income requirements, such as being under certain income thresholds
• Credit score minimums
• Debt-to-income ratio requirements
• Agreeing to stay in the home for a period of time
• Financial literacy requirements, such as attending financial counseling about homeownership
• Job requirements, like being a teacher or first responder for specific grants

Again, the requirements for specific grants or loans will vary by program, but each state typically has several to consider.

Save more

If you have a flexible timeline for your home purchase, consider postponing the process until you have more savings. Determine how much you need to save, and set aside money in a high-yield savings account every month. You might be surprised how fast you can grow your account balance.

Family or friend loan

If you have friends or family willing to lend money, you can use the funds for your down payment. This option requires strong communication skills because you and the person loaning the money must get on the same page about the terms and conditions.

Discuss whether you need to pay the money back, the timeline for doing so, and any fees or interest charges. 

401(k) loan or IRA withdrawal

According to Fidelity Investment data from Q1 2024, the average retirement account balance for a 401(k) is $125,900, and the average balance for an IRA is $127,745. If you are among the employees with a high retirement plan balance, you might be able to borrow money from it to help cover down payment costs. 

A downside to a 401(k) loan is losing out on account gains during the loan repayment term, which might delay your retirement. Additionally, if you don’t keep to the repayment schedule set by your employer’s plan, your loan might be treated as an early distribution and subject to a 10% tax. 

A pro is that you might be eligible for a longer repayment term when using a 401(k) loan to purchase a primary residence, but it varies by plan. Additionally, interest rates tend to be lower than you can find elsewhere. You also don’t need to undergo a credit check because you’re borrowing from yourself.

Reminder from our expert

Erin Kinkade

CFP®

The availability of this option depends on whether the employer plan allows this, the plan repayment terms, and whether a waiting period applies before you can begin making contributions again (which could lead to missing out on an employer match).

Another option is to withdraw from your IRA if you have one. Typically, you would be subject to a 10% tax if you withdraw from your IRA early. However, the IRS lists several exceptions to this rule, and one of those is withdrawing up to $10,000 to fund the purchase of your first home.

If you can withdraw money from your IRA penalty-free, that is preferable to a 401(k) loan because you do not have to pay it back. However, like taking money out of a 401(k), the downside is you miss out on account gains you could have made by leaving the money invested until your retirement years.

Home equity loan or HELOC

Homeowners who want to purchase additional properties can use a home equity loan or line of credit (HELOC) to fund the down payment. Once you own a property, you can use some of the equity you’ve built to buy another one. Borrowing against your home equity is often much cheaper than other funding options due to competitive interest rates. However, you might need to pay fees. 

Most importantly, these loans can pose additional risks because your home is the collateral. That means if you’re unable to repay the loan, the lender could foreclose on your house.

Piggyback loan

Piggyback loans, also called an 80-10-10 mortgage or a combination mortgage, allow you to use two separate mortgages to buy a house—a larger mortgage that covers the bulk of the cost and a smaller mortgage that helps fund the down payment. This might allow you to avoid paying PMI. However, you’ll have two monthly payments.

Piggyback loans are rare today. They were prevalent during the housing boom in the early 2000s, but lenders have been less likely to offer these loans since the market crash in 2008. Instead, borrowers can access down-payment assistance programs, which are often much cheaper. 

FAQ

What is the most common way homeowners fund a down payment?

Most homeowners fund a down payment with cash, setting aside money for months or years to prepare for their home purchase. Others receive financial gifts from family members to help cover the down payment costs. Many homeowners also use down-payment assistance programs and VA loans. 

Can you use gifts or grants for a down payment instead of a personal loan?

You can use gifts for a down payment instead of a personal loan, though some lenders might require you to submit a gift letter with it, stating that the money is a gift and not a loan.

Many states also offer down-payment assistance programs for residents, including grants. If you get a grant, you don’t need to repay the funds. Some homebuyers also receive financial gifts from family members to help cover their down payment costs.  

How much down payment do you need to avoid PMI?

For most loans, you need a down payment of at least 20% to avoid PMI. However, some loans, including VA loans and physician loans, don’t charge PMI. If you do have to pay PMI, it’s essential to understand the terms and conditions of your loan so you can budget accordingly. 

What’s the difference between a down payment and earnest money?

The buyer provides an earnest money deposit to the seller to demonstrate their seriousness about buying the house. Earnest-money deposits are often 1% to 2% of the purchase price.

If the deal falls through due to an approved contingency, the buyer could get their earnest money back. Buyers can count their earnest money towards their down payment if the deal moves forward. A down payment is money buyers pay to the lender during closing, usually between 3% and 20% of the home’s purchase price.   

Are there special down-payment assistance programs for first-time homebuyers?

Yes, many states offer down-payment assistance programs for first-time homebuyers. The details of each program, including eligibility requirements and funding, vary by state. You can review the options in each state through the U.S. Department of Housing and Urban Development.

How does your credit score affect your down payment requirements?

Your credit history influences how much money you must spend toward your down payment. Lenders consider credit scores when determining down payment requirements and interest rates. 

Borrowers with higher scores might be able to put down a lower amount, and borrowers with lower scores might need to put down more. 

What are the tax implications of using various sources for your down payment?

The source of your down payment determines whether you need to pay taxes on the money. If you receive a gift, you don’t need to pay taxes on the money. However, the person who gave you the money might, depending on the amount. You also don’t need to pay taxes if you use money from savings. 

If you sell stocks to fund your down payment, you might have to pay capital gains tax, and it could affect other factors such as your adjusted gross income (AGI) or modified adjusted gross income (MAGI).