Can I use a personal loan for a down payment on a house?
Find out if you can — or should — take on more debt to cover the upfront cost of your mortgage.
Being able to afford the down payment on a mortgage is often the biggest struggle for first-time homebuyers. Lenders typically ask for 20% down on conventional mortgages or require you to purchase private mortgage insurance (PMI), which can be expensive.
A personal loan might seem like a good way to cover that high upfront cost, but it’s not always possible — or a good idea.
Can I use a personal loan for a down payment on a home loan?
You might be able use a personal loan for a down payment on a home loan in some cases, but it’s rare. While personal loan providers don’t prevent you from using your funds to pay for a down payment, most mortgage companies do.
This is because taking on debt to pay off more debt could make it harder for you to afford your home loan. There’s a reason mortgage providers ask for a down payment — it means you’re financially stable enough to take on such a large amount of debt.
Disadvantages of using a personal loan
Even if your mortgage company allows you to use a personal loan to pay for your down payment, you might want to reconsider it. That’s because the drawbacks often outweigh the benefits.
It lowers your credit
Every time you apply for a loan, your lender pulls something called a hard credit check — also known as a hard credit inquiry. A hard inquiry shows up on your credit report and temporarily lowers your credit score.
Having a recent credit inquiry doesn’t look good when you apply for a loan. And with a lower credit score, you likely won’t qualify for competitive rates and terms.
It raises your debt-to-income ratio
In addition to lowering your credit score, taking on more debt means you have a higher debt-to-income (DTI) ratio. Your DTI is based on your monthly debt obligations and income. It’s also one of the top factors that lenders consider when you apply for a loan.
The higher your DTI, the less likely a lender will give you favorable rates or terms. Most mortgage companies won’t work with borrowers who have a DTI higher than 36%.
You’ll have more monthly payments
You’ll have less money to spend each month if you take out a personal loan to pay for your mortgage’s down payment.
If you’re unable to afford both payments, you risk ruining your personal credit score if you can’t pay off your personal loan. And if you can’t afford to pay off your loan and your mortgage, you could end up losing your home.
Is it ever a good idea?
A personal loan might help in some extreme situations if you have excellent credit and minimal monthly debt obligations. But double-check that your lender allows you to use a personal loan for the down payment before you apply.
- You have money coming in, but need to make an offer now. You’re waiting for funds to come in from something you’re legally entitled to in the near future, like an inheritance. But you have an offer on your dream home right now that can’t wait. A personal loan may bridge the gap until you receive your funds.
- You’re moving for a job — and not on a trial basis. You got a high-paying job with airtight security and buying a home makes more financial sense than paying the sky-high rent in your new town. You can easily pay off your personal loan quickly while comfortably affording your mortgage payments once you start working.
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4 alternative ways to get full or partial funding for a down payment
Just because a personal loan might not be the best way to pay for a down payment doesn’t mean you don’t have other financing options. If you need help covering the upfront cost of your mortgage, you might want to check out one of these 4 alternatives.
1. The First-Time Home Buyer Incentive
If you’re a first-time buyer with a qualified annual income of $120,000 or less, you may be eligible for the First-Time Home Buyer Incentive offered by the government. The incentive is worth 5-10% of a newly built home or 5% of an existing home or mobile home – this can help lower the amount you need to borrow.
2. Provincial programs for home buyers
Many provinces have down payment assistance programs that offer grants you can use to cover the upfront costs of your home loan. To get started on your search, visit the ministry or department responsible for housing in your province (see below):
|Province/Territory||Contact for housing information|
|Alberta||Government of Alberta: Housing and Community|
|British Columbia||Ministry of Municipal Affairs & Housing|
|New Brunswick||Government of New Brunswick, Social Development: Housing|
|Newfoundland & Labrador||Newfoundland and Labrador Housing Corporation (NLHC)|
|Northwest Territories||Northwest Territories Housing Corporation|
|Nova Scotia||Housing Nova Scotia|
|Nunuvut||Nunuvut Housing Corporation|
|Ontario||Ministry of Municipal Affairs and Housing|
|Prince Edward Island||Government of Prince Edward Island: Housing|
|Quebec||Société d’habitation du Québec|
|Saskatchewan||Saskatchewan Housing Corporation (SHC)|
|Yukon||Yukon Housing Corporation|
3. Loans from friends or family
Borrowing from your friends or family can put your relationship at risk, but they’ll likely be more understanding if you hit a bump — and possibly willing to forgive the debt.
Not comfortable taking money from the people in your life? If you want to make it formal, some online services provide templates for legally binding documents citing rates, terms and penalties if you’re unable to repay your loan on time.
4. RRSP loans
If you have enough funds in your retirement account to cover your down payment and airtight job security, borrowing from your RRSP could be a cheaper alternative to a personal loan. However, you run the risk of losing your retirement savings to heavy taxes and fines if not done right. You might want to check out our guide to RRSP loans first to make sure you understand the risks and benefits.
If you’re a first-time home buyer, you can withdraw up to $35,000 ($70,000 for couples) from your RRSP to cover the down payment on your home under the Home Buyer’s Plan. Created by the government to help first-time buyers afford a new home, this program allows you to make tax-free withdrawals from your RRSP as long as the money is repaid within 15 years. Furthermore, you can pay the loan back at any time with no penalties.
Most mortgage lenders won’t allow you to use a personal loan to pay for the down payment on your home. And even if yours does, it’s not always the best idea. Instead, you might want to look into less risky, less expensive alternatives.
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