Using A Personal Loan To Buy A House: Is It Possible?

A personal loan can be used for various purposes and is relatively easy to get if you meet a lender’s credit and income requirements. Because of a personal loan’s straightforward application process and array of uses, some first-time home buyers might wonder if they can use a personal loan to buy a house – or at the very least cover their down payment.

Not only is this not advised, but it’s generally not possible for a few reasons. Still, a personal loan can assist you in several ways on your home buying journey.

In most cases, it’s impossible to buy a house using a personal loan. Personal loan amounts generally range from $1,000 – $50,000. According to the National Association of REALTORS® (NAR), the median home sale price for existing homes in February 2024 was $384,500 – much more than you can collect with a standard personal loan.

Using a personal loan to buy a house could be feasible if you found a house being sold for an amount in the $1,000 – $50,000 range, but that’s extremely rare. Almost inevitably, a home priced this low would require major renovations before it’s livable. So, for multiple reasons, your safest bet is to apply for a mortgage.

A mortgage lender typically won’t approve you to use a loan for your down payment. The down payment on a mortgage is meant to show a lender you have the financial means to afford the home you’re buying, so borrowing money to put down doesn’t demonstrate financial readiness. Plus, depending on the type of mortgage you’re getting and the price of the home, your personal loan might not even cover the whole down payment.

If a lender did approve your use of a personal loan, though, it’s highly likely they’d charge a higher interest rate. You’d also end up paying back two loans at once – the mortgage and the personal loan you took out for the down payment.

In the unlikely event you do purchase a house with a personal loan, you’ll find yourself facing certain financial disadvantages. That said, this strategy has the upsides mentioned next.

Pros

• Your house isn’t collateral. Personal loans are usually unsecured, meaning your house won’t be used as collateral for the loan as it would for a traditional mortgage. Despite you not risking the possibility of losing your home if you miss payments or default on the loan, your credit score could take a massive hit.
• You can get a personal loan faster than a mortgage. Getting a personal loan is a relatively straightforward process, and it has a quicker funding time than many other loan options. Once approved, a personal loan should only take 1 – 7 business days to hit your bank account.
• Repayment periods are shorter for personal loans. A personal loan repayment term can last anywhere from 12 – 60 months, and possibly longer if you’re seeking a long-term loan. Compared to a mortgage’s 15- or 30-year term length, potentially paying off your home in 5 years or less can sound pretty appealing.

Cons

• Personal loans come in smaller amounts than mortgages. As mentioned, personal loans are offered in much smaller amounts than you’ll find with a mortgage loan. Under rare circumstances, though, it’s possible to get a personal loan for up to $100,000.
• Monthly payments may be high. With a shorter repayment period and likely a higher interest rate than you’d have on a mortgage, your monthly payments on a personal loan could be higher than you’re comfortable with.
• Interest isn’t tax-deductible for personal loans. Unlike with mortgage interest, you can’t deduct the interest from your personal loan at tax season. Only certain business or educational expenses may qualify for tax deductions.
• You could be repaying two loans at once. If a lender approves using a personal loan for a down payment, you’ll be simultaneously repaying the mortgage and the personal loan for at least a while. Those two monthly payments could become difficult to budget for, especially if you have a high interest rate on either loan or both loans.

A personal loan could still help you achieve your home buying dreams by enabling you to make several financial moves, which we’ll discuss next.

Buying Land To Build A Home On

If your home is going to be a new construction, you could use a personal loan to buy land to build on. By utilizing a loan for the land, you could focus your savings on affording the down payment for your new home.

Financing Renovations

If you’ve purchased a home that needs renovations or improvements, you may be able to get a home improvement loan to help cover those expenses. Homes in need of repair will often cost less upfront and require a smaller mortgage.

Consolidating Credit Card Debt

Having a lot of outstanding credit card debt can affect your ability to get the mortgage you need for your dream home. If you want to pay down your debt before you begin the home buying process, it’s not a bad idea to consolidate your debt with a personal loan.

Debt consolidation means paying off all of your separate credit card debts with a single loan so you only have one monthly payment and interest rate to worry about. This can also help you improve your credit score and debt-to-income ratio (DTI), which mortgage lenders use when approving a mortgage.

Purchasing A Tiny Home

Tiny homes are a form of alternative housing and are popular with some home buyers, particularly for their cost-effectiveness. The average tiny home costs around $50,000, but a tiny house can run as high as $100,000 or more depending on its square footage.

So, a tiny house on the lower end of the tiny house price range could be affordable with a personal loan.

Buying A Manufactured Home

Manufactured homes (sometimes called mobile homes) cost $127,250 on average. You may not be able to finance the entire purchase of the home with a personal loan, but a personal loan could still cover a significant chunk of the purchase price. When buying a mobile home, consider all of your options and the potential for additional costs, such as mobile home insurance and a monthly lot fee.

Getting a personal loan, whether to finance a home or aid in your purchase of one, can have certain effects on your credit score. For one, applying for a personal loan involves the lender performing a hard inquiry into your credit.

This will drop your credit score slightly, even if you aren’t approved for the loan. Making on-time payments toward your loan once approved can quickly raise your score back up to pre-credit inquiry levels.

If you’re securing a loan to pay off debt prior to buying a home, consider how getting a personal loan could affect your mortgage approval. Taking on new debt just before applying for a mortgage is likely to alter your credit score and DTI, meaning you might not qualify for the best mortgage interest rate and repayment term. Or, it’s possible you may not qualify for a mortgage at all.

If a down payment is a barrier to homeownership for you, consider taking the following alternative steps, which won’t leave you with another debt to pay.

Focus On Your Savings

If you plan to buy a home in the near future, now is the time to start seriously setting money aside. Assess your financial situation and decide how much income you can hold onto every month while still affording the essentials. You won’t have to worry about financing your down payment if you have enough money stashed away.

Make A Smaller Down Payment

Not every home buyer puts down 20% of a home’s purchase price, even if that’s almost universally considered the ideal minimum down payment. Conventional lenders sometimes accept a down payment of as little as 3%, and loans insured by the Federal Housing Administration (FHA) typically require a 3.5% down payment.

If you can afford the minimum down payment on a home and that’s all you pay upfront, you won’t have to stretch your budget to buy the house you want.

Seek A Zero-Down Loan

Certain loans require no down payment to qualify for financing. The Department of Veterans Affairs (VA) offers loans with no down payment requirement to qualifying active-duty service members, veterans, members of the National Guard, Army Reserve and surviving spouses. The minimum credit score for VA loans is set by individual lenders, not the VA itself.

The Department of Agriculture (USDA) likewise offers zero-down mortgages, but USDA loans have separate eligibility requirements that borrowers and their desired property must meet.

Apply For Down Payment Assistance

The Department of Housing and Urban Development (HUD) offers several programs and grants designed to help eligible home buyers afford the down payment on their home. Programs vary by location, so take a look at the HUD website for programs in your area.

Ask Friends Or Family Members For Help

Mortgage lenders allow borrowers to use money gifted to them by friends or family members to help cover the costs associated with a down payment. The only requirement is that you must provide a signed gift letter stating that the funds aren’t a loan. Borrowing from family members or friends might also be an option, but your lender could view this as akin to taking out a personal loan for the down payment.

In most cases, a personal loan can’t be used to buy a house. Loan amounts are too small to afford the average-priced home, and lenders may not approve of you borrowing funds to cover your down payment.

That said, a personal loan could help you afford your dream home in other ways. Just be sure to consider all of the pros and cons of getting a personal loan and how it could affect your credit score.

To jump-start the personal loan process, fill out an application today with Rocket Loans℠.