Can I use a personal loan for a down payment on a house? | finder.com
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Can I use a personal loan for a down payment on a house?

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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.

In fact, many mortgage providers check all inquiries on your credit report over the past year to make sure you haven’t taken out a personal loan.

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 43%.

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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Rates last updated December 16th, 2018

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Name Product Product Description Min. Credit Score Max. Loan Amount APR
Even Financial Personal Loans
Get connected to competitive loan offers instantly from top online consumer lenders.
550
$100,000
3.84% to 35.99% (fixed)
Credible Personal Loans
Get personalized rates in minutes and then choose a loan offer from several top online lenders.
Good to excellent credit
$100,000
4.99% to 36% (fixed)
LendingClub Personal Loan
A peer-to-peer lender offering fair rates based on your credit score.
660
$40,000
6.95% to 35.89% (fixed)
Monevo Personal Loans
Quickly compare multiple online lenders with competitive rates depending on your credit.
550
$100,000
3.34% to 35.99% (fixed)
NetCredit Personal Loan
Check eligibility in minutes and get a personalized quote without affecting your credit score.
550
$10,000
34% to 155% (Varies by state) (fixed)
SoFi Personal Loan Fixed Rate (with Autopay)
No fees. Multiple member perks such as community events and career coaching.
680
$100,000
7.24% to 15.24% (fixed)
Marcus by Goldman Sachs Personal Loans
Consolidate your debt or pay off large expenses with competitive rates and no fees.
Good to excellent credit
$40,000
6.99% to 24.99% (fixed)
OneMain Financial Personal and Auto Loans
An established online and in-store lender with quick turnaround times. Poor credit is OK.
Varies
$30,000
16.05%–35.99%* (fixed)
Avant
Conveniently check your loan options without affecting your credit score.
580
$35,000
9.95% to 35.99% (fixed)

Compare up to 4 providers

5 alternative ways to pay 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 five alternatives.

1. A mortgage with a lower down payment

While conventional mortgages often come with a 20% down payment or more, that’s not the case with all mortgages.

  • FHA mortgages. Mortgages insured by the Federal Housing Administration (FHA) sometimes come with down payments as low as 3.5%. While you’ll be on the hook for mortgage insurance premiums (MIP), these may be less expensive than monthly personal loan repayments.
  • HomeReady mortgage program. Fannie Mae offers a mortgage program with down payments starting at 3%. To qualify, you have to take a homeownership education course, have a credit score of at least 620 and meet certain income requirements.
  • VA mortgages. One of the perks of being a veteran is that you might not need to make a down payment at all. Many loans guaranteed by the US Department of Veterans Affairs (VA) cover the full cost of your home and don’t require money up front.
  • USDA home loans. Residents of rural areas can apply for a home loan through the US Department of Agriculture (USDA). There are two options for USDA home loans: Guaranteed Home Loans and Direct Home Loans for low-income borrowers. Neither require a down payment.

2. Down payment assistance programs

Many states have down payment assistance (DPA) programs that offer grants you can use to cover the upfront costs of your home loan. To get started on your search, visit the US Department of Housing and Urban Development (HUD) for state grant programs and local nonprofits that could help.

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, you can use a service like LoanWell to draw up legally binding documents citing rates, terms and penalties if you’re unable to repay your loan on time.

4. 401(k) loans

If you have enough funds in your retirement account to cover your down payment and airtight job security, borrowing from your 401(k) 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 401(k) loans first to make sure you understand the risks and benefits.

5. Simultaneous second mortgage

Also known as a piggyback loan, simultaneous second mortgages are what they sound like: two home loans at once.

Typically, borrowers take out a first mortgage to cover 80% of the cost of their home. Then they make a down payment of 10% and borrow against that, taking out a second mortgage worth 10% of their home’s value.

While you won’t pay as little of a down payment as you would on an FHA loan, you’ll avoid having to take out mortgage insurance, which can be expensive.

Bottom line

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.

To learn about when it might be a good choice, check out our guide on personal loans.

Frequently asked questions

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Anna Serio

Anna Serio is a staff writer untangling everything you need to know about personal loans, including student, car and business loans. She spent five years living in Beirut, where she was a news editor for The Daily Star and hung out with a lot of cats. She loves to eat, travel and save money.

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US Personal Loans Offers

Important Information*
Credible Personal Loans

Get personalized rates in minutes and then choose a loan offer from several top online lenders.

Even Financial Personal Loans

Get connected to competitive loan offers instantly from top online consumer lenders.

LendingClub Personal Loan

A peer-to-peer lender offering fair rates based on your credit score.

SoFi Personal Loan Fixed Rate (with Autopay)

No fees. Multiple member perks such as community events and career coaching.

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US Personal Loans Offers

Important Information*
Credible Personal Loans

Get personalized rates in minutes and then choose a loan offer from several top online lenders.

Even Financial Personal Loans

Get connected to competitive loan offers instantly from top online consumer lenders.

LendingClub Personal Loan

A peer-to-peer lender offering fair rates based on your credit score.

SoFi Personal Loan Fixed Rate (with Autopay)

No fees. Multiple member perks such as community events and career coaching.

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