Struggling to make a down payment on a house is what most home buyers tend to face, which creates an alternative funding option. Making use of a personal loan for a down payment on a house isn’t a good idea, generally speaking.
Still instead, other options should be considered when trying to purchase a home, such as using down payment assistance programs, alternative lenders, FHA loans, and other less risky and less costly loan options. This always makes people ask if using a personal loan is the best option.
Personal Loan For Down Payment On House
Most of the time, making use of a personal loan for a down payment in house isn’t really a great idea. Generally, mortgage lenders also reject home buyers using personal loans and prefer not to get a down payment from any other financial 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 is being invested in your own money. It also makes lenders question your ability to pay for a house if you cannot 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 a down payment only if there are no other available lending options. This 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 until you finish 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 you would save from not making a down payment when buying a house would be short-lived.
This is why every home buyer must 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 if you fail to meet up with paying back what you owe.
This makes lenders charge higher interest rates because they are also aware 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 of 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 Down Payment On House
Even though it isn’t recommended for anyone to take a personal loan on a down payment on a 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 would help if you searched for an interest rate you are qualified for and seek the best options for your current situation.
Online lenders and credit unions are known to offer the 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 your monthly mortgage bill.
If you decide to use a personal loan for a down payment on the house, ensure that you have sufficient money to use as a closing cost, but technically, personal loans can cover closing costs and down payment.
However, if you know you cannot meet the closing costs and the down payments, you should reconsider purchasing a house because it comes with a high monthly mortgage and personal loans.