Saving up for a down payment on a home can be a challenging endeavor, which is why it can be tempting to take out a personal loan to use as a down payment. However, while personal loans can be used for many purposes, a mortgage down payment is not one of the recommended (or, in many cases, permitted) uses.
You may be rejected if you plan to use a personal loan as a down payment for a mortgage. This is because it may indicate you aren’t the most reliable borrower, as it can increase your debt-to-income (DTI) ratio. Understanding these restrictions can ensure you don’t breach any loan terms that could delay your approval for a mortgage.
A personal loan is a lump sum of money that you can use for almost any purpose: a big, one-time purchase, an event, debt consolidation and more.
While you can take out a personal loan to pay for a down payment, most conventional loan and FHA loan lenders do not allow this.
Opting for any down payment assistance programs or saving up for a down payment are better ways to make the homebuying process easier.
What Is a Personal Loan and What Can It Cover?
Personal loans are sums of money that you can use for almost any purpose, originating from banks, credit unions and online lenders. Because of its versatility, it’s an attractive financial product.
Some uses for a personal loan include:
- To pay for large purchases: Paying for one-time large purchases, such as an appliance, furniture or similar, is the most common use of a personal loan. It allows you to get items or services that may otherwise take you a while to purchase and pay for them over time.
- To consolidate debt: If you have several debts, taking out a personal loan is a way to roll them into one large loan that’s easier to manage.
- To pay off high-interest debt: If you have a loan with a high interest rate, you can choose to refinance your personal loan to get a lower interest rate. But this only applies if you qualify and have a better credit score than you did before.
- To undergo a life change: Some life changes may require a big amount, such as starting a new career or paying for a wedding.
- To undertake a project: Financing a home renovation can be costly, which a personal loan can help pay for.
- To invest: While it’s risky and not recommended, some individuals use a personal loan to invest — for instance, investing in a friend’s business or purchasing loans or stocks.
- To pay for an emergency: Emergencies can crop up at any time, and sometimes, your emergency fund is not enough. This is where a personal loan can come in.
Can You Get a Personal Loan for a Down Payment?
While it’s possible to use a personal loan as a down payment for a mortgage, it may be challenging.
Homebuyers are generally not allowed to use personal loans for down payments on conventional home loans and FHA loans. Personal loans are a form of debt. And the more debt you have, the riskier it is for the lender. Down payments are meant to reduce the risk on the lender’s end, which is why using a personal loan as a down payment for a mortgage is unlikely to work to your advantage.
But how will lenders know? Part of the typical mortgage approval process involves looking at your debt-to-income (DTI) ratio, which indicates how much debt you have compared to your income. Lenders generally require an average DTI ratio of less than 43% — and for some lenders, it's 36%. If you take out a personal loan to use as a down payment, your DTI will rise and potentially disqualify you from getting a mortgage.
On top of it being risky for the lender, juggling a personal loan and a mortgage can be taxing on your finances. Once you get your home, you're likely to pay for a host of other expenses, and ensuring your income is as "free" as possible to cover unexpected costs is vital.
While personal loans are a versatile financial product, they are not meant to cover everything. Some expenses a personal loan can’t cover include:
- Educational expenses: Personal loans cannot be used for tuition and other educational expenses. Instead, you can opt for federal or private student loans, which often come with lower interest rates.
- Gambling or illegal activities: Taking out a personal loan often comes with a clause to not use the funds for gambling or illegal activities. These are risky endeavors, which could mean that the lender may lose their money if you are unable to repay the loan.
- Living expenses: Using a personal loan to pay for living expenses is not the best idea if you’re strapped for cash. Instead, you may be able to find assistance programs and financial support for your utility bills and other everyday expenses.
- Business expenses: Some lenders may not allow you to use your personal loan to pay for business-related expenses. Instead, opt for a business loan, a business line of credit or a business card.
Pros and Cons of Using a Personal Loan for a Down Payment
On the off chance that you are able to use a personal loan as a down payment for a mortgage, understanding the pros and cons of doing so can help you determine if it’s the right path for you.
- It can expedite the process of getting a mortgage: A personal loan skips the lengthy time to save up for a down payment.
- It can help lower the amount you need to borrow on the mortgage: If you have a high down payment, this means you can reduce how much you borrow, which can lead to more manageable payments in the long run.
- It saddles you with more debt: Owning a home involves a lot of costs, and having two loans to pay for — your personal loan and a mortgage — can leave you struggling to meet your other obligations.
- It may negatively impact your financial opportunities: Taking out a personal loan, especially if it’s hefty enough to pay for a down payment, will increase your DTI ratio. A high DTI ratio could make lenders reluctant to let you borrow money in the future.
- It may be more expensive than it’s worth: In general, personal loans have a significantly higher interest rate compared to home mortgage rates. Even if you have excellent credit, you are unlikely to get the same rate as your mortgage, which means that you’re paying more for your down payment.
How to Get the Right Personal Loan
Finding a lender who will allow you to use a personal loan as a down payment for a mortgage can be tricky. However, if you find one, keep in mind that there are a few other factors to consider when evaluating whether that lender and its loan terms are the right fit.
Assess the eligibility requirements
Take a look at the lender’s requirements. What credit score do they require? How much income is needed?
Determine the rates and fees involved
If your desired lender has a prequalification option, it’s best to use this avenue to have a rough idea of your potential rates and fees. This way, you can plan around them and see who might give you the best offer.
Choose a suitable loan term
Opt for a loan term that allows you to repay the loan comfortably and without strain. However, keep in mind that the longer the term, the more interest you will pay.
Find out about any loan penalties
Juggling both a mortgage and a personal loan can be tight on your finances. Knowing ahead of time if there are any loan penalties can help you manage your payments wisely.
Alternatives to Using a Personal Loan for a Down Payment
Taking out a personal loan to use as a down payment is not the wisest choice, as it can be a challenge to get and may cause more problems down the line. That said, there are other alternatives you can explore to ensure your homebuying experience goes smoothly.
If you already have a home, one loan you can consider is a home equity loan, which leverages the equity you’ve built on another home. It's risky if you are unable to pay it back, however, since the lender will be using your home as collateral.
There are several homeownership assistance programs, particularly those that can help you with the down payment. The LIFT program, along with the National Homebuyers Fund, both provide grants that can be used for any type of mortgage.
While it can take a while, saving for a down payment yourself is the safest way to avoid additional debt.
If you’re close to your goal but not quite there yet, your friends and family may help. Reach out to ask if you can borrow enough to cover your down payment. Remember, you can get a conventional mortgage with as little as a 3% down payment.
Some mortgages don’t require a down payment, such as:
- U.S. Department of Agriculture (USDA) Loans: The USDA loan program provides low- and moderate-income households with access to housing in eligible rural areas.
- Veterans Affairs (VA) Home Loans: A VA home loan is meant to help service members, veterans and their families have easier access to housing.
FAQs About Using a Personal Loan for a Down Payment
From making a bid to walking into your new home, purchasing a home is an exciting endeavor — but paying for a down payment is often the first major step. Learn more about putting a down payment on a home and whether using a personal loan is a feasible option.
Learn More About Mortgage and Personal Loans
- NeighborWorks America. "LIFT Programs — Let's Invest for Tomorrow." Accessed February 14, 2023.
- National Homebuyers Fund, Inc. "Homeownership Programs." Accessed February 14, 2023.
- USDA. "Single Family Housing Guaranteed Loan Program." Accessed February 14, 2023.
- U.S. Department of Veterans Affairs. "VA Home Loans." Accessed February 14, 2023.
The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.
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