Struggling to make a down payment on a house is what most home buyers tends to face and this creates the need for an alternative funding option. Making use of a personal loan for a down payment on house isn’t a good idea generally speaking but instead, other options should be considered when trying to purchase a home such as making use of down payment assistance programs, alternative lenders, FHA loans and and other less risky and less costly loan options. This always make people to ask if using a personal loan is the best option.
Personal Loan For A Down Payment On House
Most of the times, making use of a personal loan for a down payment in house isn’t really a great idea and generally, mortgage lenders also reject home buyers making use of personal loans and also prefer that you do not get a down payment from any other finance lending institution. Making use of a personal loan already defeats the aim behind the down payment contribution because the payment is meant to show that money that is being invested is your own money.
It also makes lenders to question your ability of being able to pay for a house if you are not able to afford a down payment. Having said this, it is also okay for your mortgage lender to agree to a home buyer making use of a personal loan as down payment only if there are no other available lending options. This simply tells you that your last resort should be the personal loan if you have exhausted all other loan options but you will have to pay the interest and lender principal till you finish off with paying the entire money borrowed.
However, personal loans are known to have shorter terms when compared with mortgages and in most cases, monthly payments might be higher since they have shorter periods. This means that the money that you would save from not making a down payment when buying a house would be short lived. This is why it is necessary for every home buyer to reveal his down payment source with bank statements and records. Personal has its own disadvantages as well.
Personal loans can also be described as unsecured debt because there is no collateral attached to it of you fail to meet up with paying back what you owe. This makes lenders to charge higher interest rates because they are also aware of the fact that your personal loan has no backing. Not just that personal loans have higher interest rates but they also have other disadvantages too;
- Tends to increase your debt to income ratio
- Your loan request might get turned down by lenders because you have a history or taking a personal loan
- Higher monthly payments when it comes to personal loans and mortgages
- There is also a high possibility of lenders granting you the mortgage amount that is needed
- There is a hard credit pull on each personal loan that you pull and this in turn reduces your credit score therefore making it difficult for any loan you apply for to be approved
How To Get A Personal Loan For A Down Payment On House
Even though it isn’t recommended for anyone to take a personal loan on a down payment on house, you would need to shop around for the best rate if your lender agrees to you getting a personal loan when purchasing a house. It is advisable that you search for an interest rate you are qualified for as well as seeking best options for the situation you are in currently. Online lenders and credit unions are known to offer best rates compared to traditional banks so it is a smart move for you to go for the best possible lowest rate.
Going for the best possible lowest interest rate is the best option because you also need to meet up with your monthly mortgage bill too. If you decide to make use of a personal loan for a down payment on house then ensure that you have sufficient money to use as closing cost but technically, personal loans can cover up for closing costs and down payment. However, if you know you cannot meet up with the closing costs and the down payments then you should reconsider purchasing a house because it comes with high monthly costs for mortgage and personal loans.