Can You Use a Personal Loan to Buy a House?

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You can use a personal loan to buy a house if you won’t also need a mortgage loan. Mortgage lenders usually don’t allow buyers to use personal loans for down payments, so having a recent personal loan in your credit history could make it harder for you to be approved for a home loan.

3 Things About Using a Personal Loan for a Down Payment

When you’re buying your first home, coming up with a down payment can be challenging. Keep these in mind when you’re ready to put money down.

1. You May Be Seen as a Risky Borrower

Putting up your own money shows the lender you can afford to own a home and that you’re less likely to default, which means you’re less of a risk to the lender.

However, using a personal loan for the down payment would cancel out these advantages, so mortgage lenders don’t allow it. But that’s not a bad thing.

2. Your Debt Will Increase

A personal loan would increase your debt, which would drive up your debt-to-income (DTI) ratio.

What Is DTI?

DTI compares your total monthly debt payments, including your house payment, to your monthly income. The higher your DTI, the smaller the home payment you can afford, and the less likely you are to be approved for a home loan.

It might be tempting to take out a personal loan well in advance of applying for a mortgage and hold the cash in a savings account until you’re ready to buy. Avoid the temptation.

3. Can You Prove Your Down Payment Source?

The underwriter will review your finances in detail when it evaluates your mortgage application. They want to see “seasoned and sourced” down payment funds in your accounts — money with a clear, documented source that has been in your account for an extended period of time.

This is the lender’s way of ensuring your down payment money isn’t from borrowed funds. If the lender sees unexplained deposits, you’ll likely need to document the source as a condition for mortgage approval.

Can You Use a Personal Loan To Buy a Home in Cash?

Yes. You can get a personal loan to pay for a cash sale. It might be difficult to buy that way, though. Most lenders cap loans at $50,000 to $100,000, so you’d need to buy a very inexpensive home or have a lot of additional cash to put toward the purchase.

You might be able to find foreclosure listings in that price range, or perhaps buy a home for under $100,000 at auction. A manufactured home is another option.

You should be aware that the interest rate on your personal loan could be higher than the rate you’d pay on a mortgage, and unlike with a mortgage, you can’t deduct the interest. Also, the loan term will be much shorter — two to seven years, typically.

What Happens if You Try To Use a Personal Loan During Mortgage Approval?

Your mortgage lender might decline your application if you try to use a personal loan, or even apply for one, during mortgage approval.

What Happens During Mortgage Underwriting?

Mortgage lenders use a process called underwriting to examine your credit history and your overall finances.

A personal loan application appears on your credit report as an inquiry. If you accept a personal loan offer, the new account will also appear on your credit report. The underwriter will see these entries and possibly decline your application. Also, the new loan could cause your credit score to drop below the minimum score needed for the mortgage loan, which would disqualify you from financing.

The Downsides of Using a Personal Loan for a Down Payment

Trying to use cash from a personal loan that someone else takes out on your behalf, under their own name, would also derail your mortgage application because lenders usually require borrowers to document the source of down payment money.

The financial statements you submit to the underwriter would show the large cash deposit, or series of deposits, into your account. You would need to claim and document that the funds were a gift, not a loan. Reporting that falsely could land you in hot water for mortgage fraud.

Remember that lenders do one final credit check immediately before closing to make sure your credit report hasn’t changed since you were approved. A new loan or loan application could prompt the lender to rescind its loan offer.

Can You Borrow Money for a Down Payment From Other Sources?

Mortgage lenders might let you use borrowed money from certain sources.

Down Payment Assistance

State and county housing programs, and even some lenders, offer a second-mortgage loan you can use toward your down payment and/or closing costs. Most of these loans are forgiven after you’ve lived in the home for a certain length of time.

401(k)

Your 401(k) is another potentially allowable loan source. Although the IRS allows penalty-free hardship withdrawals from your 401(k) to buy a home, you’ll pay income tax on the withdrawal and will miss out all the appreciation the withdrawn money would’ve earned over time. By borrowing money instead of withdrawing it, you avoid the income tax and earn appreciation on funds you’ve repaid.

The primary drawback of a 401(k) loan is that you’ll have to repay it quickly if you’re under age 59 ½​ and you separate from your employer. In that case, failure to repay results in both income tax liability and a penalty.

Alternatives To Using a Personal Loan To Buy a House

Rather than risk having a personal loan ruin your chances of getting a mortgage, consider one of the following alternatives.

• Save longer for a down payment.
• Buy a less-expensive home.
• Explore low- and no-down-payment conventional loans and loans backed by FHA, VA and USDA.

Pros and Cons of Using a Personal Loan Toward a Home Purchase

In the rare cases you can use a personal loan toward a home purchase, it’s important to consider the pros and cons of this type of funding.

Pros:

• Fast approval and loan funding
• Could provide some or all of the cash you need for an inexpensive home
• No collateral needed

Cons:

• Can hurt mortgage approval
• Can’t use the money for a down payment on a home being financed with a mortgage loan
• Higher interest rates compared to a mortgage loan
• Short repayment period

Who Should and Who Shouldn’t Use a Personal Loan for a House Purchase?

Most people can’t use a personal loan for a house purchase, but a few might consider it.

Who should consider it:

• Cash buyers with excellent credit and high income

Who shouldn’t consider it:

• Anyone applying for a mortgage loan
• Buyers who need larger loans or longer repayment periods
• People with high debt or damaged credit
• Homebuyers trying to use it for a down payment

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