Personal Loan for a Home Down Payment

Buying a home is both a major life milestone and a major financial decision. Despite saving up for years, many people still struggle when it comes to buying their first home. One of the biggest hurdles potential home buyers encounter is the down payment.

Almost every type of home loan will require a down payment of some sort, but not everyone can afford this. Even with a low down payment requirement, many hopeful home buyers try to turn to other sources to help them pay for the down payment such as a personal loan.

Can You Use a Personal Loan to Pay a Down Payment?

The short answer is, unfortunately, no. Very few lenders will allow you to use a personal loan to cover your down payment. Even if you do find a lender that will let you take out a personal loan to use for your home down payment, it’s not a wise financial decision and is highly advised against.

If you do find a lender that is willing to let you use a personal loan, you’ll likely have to take out both your home loan and your personal loan through them. While this may seem like it makes things easier, it’s important to note that using a personal loan to pay for the down payment on your home loan is not approved by Fannie Mae, the federal mortgage broker.

Pros and Cons of Using a Personal Loan for a Down Payment

It’s true that using a personal loan to pay the down payment does have its advantages. It also has some disadvantages, though, so take careful note of both the pros and cons of doing so before making your decision.

Pro: You Won’t Have to Save Up

When you use a personal loan for your down payment, you don’t have to spend years saving up money for a down payment. It’s a much faster way of acquiring the money to buy your dream home, so if you’re pressed for time and need to buy a home sooner rather than later, it is a quick way to obtain the money you need.

Pro: They’re Easy to Get

Compared to some other loan types, personal loans are much easier to be approved for. You’ll still have to go through the entire approval process and meet certain borrower requirements, but many people are able to take out a personal loan quickly and fairly easily.

Con: They’re Expensive

Personal loans are a type of unsecured loan, meaning they usually have higher interest rates. If you’re already worried about paying for a monthly mortgage, adding the higher costs of a personal loan is not a good idea.

Con: Raises Your DTI

Your debt-to-income (DTI) ratio is taken into account for every single loan you take out. If you take out a personal loan and then apply for a home loan, it will show up in your DTI and lenders will be much less eager to approve you for a loan.

Con: Limits Your Lender Choices

As mentioned above, there are very few lenders that will allow you to use a personal loan to pay for your down payment. If you choose to go this route, you’ll greatly limit your lender choices and won’t have as much negotiating power when it comes to interest rates and payments.

What Other Options Are Available?

If you can’t afford the traditional 20% down payment, there are other places to look for a home loan. There are several lenders that offer loans with low or no down payment, but you must first qualify for them. Here are a few types of home loans with low or no down payment requirements that might be a better choice.

Piggyback Loans

Piggyback loans allow you to take out a mortgage for up to 80% of the home price as well as an additional loan of 10% for the down payment, meaning you’ll only pay 10% for the down payment. Because of this split, they’re often called 80/10/10 loans. You can also choose to split the loan up in the form of 75/15/10.

VA Loans

If you or your partner is an active duty military member or a veteran, you will likely qualify for a VA cash out loan. These loans have no down payment requirements, no PMI requirements, and tend to have low monthly payments. As long as you qualify, this is one of the best alternatives you could choose.

FHA Loans

As long as your credit score is 580 or above, government FHA loans have a low down payment requirement of 3.5%. You will need to pay for private’s mortgage insurance if you choose to pay less than 10% for a down payment, but as soon as you reach the 10% mark, you can ask to have the PMI removed which will lower your monthly payments.

USDA Loans

Another government loan option, USDA loans have no down payment requirement. The home or property that you’re looking to buy must be eligible, but you can easily check if your home is eligible with the website’s easy eligibility checker. Just put in the address and the site will let you know if you qualify! The best news? Most of the United States is eligible!

Conventional 97 Loans

If you’re a first-time home buyer, check out the possibilities of a conventional 97 loans. This loan only requires a 3% down payment and it can be paid by friends and family or through gifted funds. You and your potential home must meet a few eligibility requirements, but if you qualify, this is a great choice for someone who needs a low-down payment loan.

Consider All Your Options

When it comes to buying a home, take your time looking around at all your mortgage options. There may be some that you didn’t know existed or that you didn’t realize you may qualify for. In many cases, simply taking the time to look around and do your research will reveal better options than using a personal loan for your down payment. If you really have no other option, though, then it can be a good backup plan.

Photo by Khwanchai Phanthong