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

When you purchase a house, you usually need to provide a down payment. Down payments reduce the amount you must borrow, lowering the overall cost of the loan. Plus, if you put enough down, you can avoid the additional expense of private mortgage insurance (PMI) payments.

Down payment requirements vary depending on the lender but often range from 3% to 20% of the purchase amount. It’s a significant amount of money. If you don’t have the cash, you might consider other ways to fund it. Personal loans as a down payment on a house might seem like a terrific solution, but most lenders don’t allow it. 

Even if you find a mortgage lender that accepts personal loans, it can be an unwise financial decision. Here’s what to consider instead. 

In this guide:

• Can you use a personal loan for a down payment on a house?
• Mortgages that don’t require a down payment 
• Alternative down-payment loan options
• FAQ

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. 

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According to 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. To avoid any surprises while you’re waiting for final approval, be transparent and honest with the lender.”

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Even if you find a lender that allows it, you can find better options than using a personal loan for your down payment. It can hurt your approval odds because it increases your debt-to-income ratio (DTI).

When you apply for a mortgage, your lender examines your credit report to ensure you can repay the loan. Your DTI is one of the factors under review. To a lender, a high DTI indicates a higher level of risk. The lender may deny the application or charge a higher interest rate if the ratio is too high. Personal loans add to your DTI ratio, making it more challenging to achieve your goal of homeownership. 

A personal loan isn’t your only option. You may have other options to afford a down payment if you don’t have sufficient savings. Here are the top choices to consider. 

Mortgages that don’t require a down payment 

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
PMI	5% (for many conventional mortgages)	Depend on lender’s requirements

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 require an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP) regardless of how much money you put down. 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. You must also make monthly PMI payments if you don’t make a down payment. Your loan amount will be higher without a down payment, which means higher interest charges. 

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.

Tip

Erin Kinkade, CFP®, advises: “Choosing this option depends on whether the home purchase is a need versus a want and whether the PMI is affordable. PMI is typically not an economical benefit when analyzing the total payments over the lifetime of the mortgage, but it may be the only option a borrower has.” 

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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	Flexible timelines
Family or friend loan	Good communicators
401(k) loan*	Younger homebuyers
Home equity loan or HELOC	Additional properties
Piggyback loan	Solid credit scores

*Whether this is an 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.

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 others provide additional loans that can help fund your down payment. The interest rates are often much lower than you can find elsewhere. Research options in your state and check whether you qualify.

Save more

If you have a flexible timeline for your home purchase, consider postponing the process until you have more savings. Lenders’ required down payments can be as small as 3%. If you plan to buy a $300,000 house, you must save at least $15,000. It’s still a large sum, but if you wanted to put down 20%, you’d need $60,000, which can take much longer to save. 

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

If you have a 401(k) retirement plan, you might be able to borrow money from it to help cover down payment costs. 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. 

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Tip

Reminder from CFP® Erin Kinkade: “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).”

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A downside to a 401(k) loan is losing out on account gains during the loan repayment term, which might delay your retirement. Repayment terms for a 401(k) loan you’ll use for a home purchase are often up to 30 years. Because of that, it’s essential to consider whether a 401(k) loan makes sense for you. 

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. These loans can pose additional risks because your home is the collateral. Plus, it’s only an option if you own a home and have equity. Even then, you could end up with three loans: a first mortgage, a home equity loan or HELOC, and a second mortgage. 

Piggyback loan

Piggyback loans 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. It’s a different way of structuring your mortgage, which might allow you to avoid paying PMI. However, you’ll have two monthly payments, which can make your housing costs skyrocket. 

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 or grants for a down payment instead of a personal loan. Many states 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, don’t charge PMI. It’s essential to understand the terms and conditions of your loan, including potential PMI charges, 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 doesn’t go through within a certain time frame, the borrower could get the earnest money back. Down payments, on the other hand, go toward the total loan cost. Buyers pay the down payment to the lender, and it’s usually between 3% and 20% of the purchase price.   

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

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 for 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. You also don’t need to pay taxes if you use money from savings. But 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).