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Can You Borrow Money for Closing Costs on a Home?

Can You Take Out a Personal Loan for Closing Costs?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated July 15, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Closing costs on a home average 2–6% of the total loan amount. This expense can be paid out of pocket via cash or a personal loan or wrapped up into the mortgage. If it’s included in the mortgage, you’ll end up paying interest on this amount over the life of the loan.If you don’t have the cash to pay for closing costs, you may be wondering if you can borrow the money. In some circumstances, yes, you are able to borrow money or use a personal loan to pay for closing costs.

Can You Use a Personal Loan to Pay for Closing Costs?

Borrowers with good credit may get a personal loan for mortgage closing costs. Bringing personal loan money to the closing table can help you finalize your home purchase. Some lenders, however, may deny your mortgage loan application during the closing process if you borrow large sums of money to cover your closing expenses.Closing expenses can range from 2% to 6% of the home purchase price, or $7,000 to $21,000 on a $350,000 property. Borrowing thousands of dollars to cover your closing costs could raise your credit risk and potentially sabotage your mortgage loan application. Below we highlight the advantages and disadvantages of using a personal loan for closing costs.

Advantages of Using a Personal Loan for Closing Costs

Here are some of the advantages of using a personal loan for closing costs:

No Collateral

You may get personal loans that include no collateral requirements. Collateral is any asset you own, such as a vehicle or deposits in a savings account, that you may offer or pledge for a secured loan. An unsecured personal loan has no collateral requirement.Recommended: What Is an Unsecured Personal Loan with No Collateral?

Quick Approval

Some lenders may approve personal loan applications in minutes and disburse the funds within hours or days. Closing on a house can take 30 to 50 days, unlike the quick approval process with personal loans. 

Disadvantages of Using a Personal Loan for Closing Costs

Here are some of the disadvantages of using a personal loan for closing costs:

Affordability

The affordability of a personal loan could be a disadvantage compared with the affordability of other consumer lending products. The average interest rate on a 24-month personal loan stood at 11.48% in February 2023, while the average rate on a 30-year fixed-rate mortgage stood at 6.875% in February 2023, data show.Some lenders may offer personal loans with interest rates up to 35.99% for borrowers with bad credit and as low as 7.99% for borrowers with excellent credit. Taking out a personal loan to finance mortgage closing costs may not make sense for you. 

HELOC Approval 

Getting a personal loan for closing costs may raise your debt-to-income ratio and make it harder for you to qualify for a home equity line of credit. A home equity line of credit, also known as a HELOC, allows homeowners to borrow against the available equity in their property to help finance large purchases. HELOC interest rates are usually lower than unsecured personal loan rates.Recommended: Home Equity Loans vs Personal Loans: Pros and Cons Comparison
Personal loan advantagesPersonal loan disadvantages
Can be unsecured with no collateralCan carry high interest rates up to 35.99%
Lenders can approve and disburse funds quicklyCan raise your debt-to-income ratio
Provide a lump sum of moneyCan raise your credit risk

4 Things to Look For When Using a Personal Loan for Closing Costs

Here are things you can look for when using a personal loan for closing costs:

1. Interest Rate

The interest rate on a loan is the amount that a lender charges a borrower for taking out the loan. Lenders can offer a fixed rate that never changes or variable rates that may fluctuate over the life of the loan. Interest rates are typically expressed as an annual percentage of the loan balance, and higher interest rates add more to the overall cost of the loan. As mentioned earlier, the average interest rate on a 24-month personal loan stood at 11.48% in February 2023, but consumers with bad credit scores may get personal loan interest rates up to 35.99%.

2. Loan Amount

The way personal loans work is you submit an application requesting a lump sum of money, and the lender may approve you for a certain amount. The loan amount is the amount of money you borrow, also known as the principal loan amount. Borrowers are expected to repay the loan amount in full by the end of the loan’s term.There are certain advantages and disadvantages of personal loans. Personal loans can provide fast access to cash for mortgage closing costs, but the loan could also raise your debt-to-income ratio and potentially complicate your mortgage closing negotiations.

3. Repayment Terms

The repayment term on a personal loan refers to the length of time a borrower has to repay the principal and interest in full. Some lenders may offer personal loans with repayment terms ranging from 12 months to seven years.Longer terms can minimize your monthly repayment burden, but longer terms may also saddle you with more interest payments over the life of the loan and leave you with a total repayment cost far above the principal loan amount.Shorter terms can maximize your monthly repayment burden, but shorter terms may also soften your total debt repayment obligation by minimizing the amount you’ll pay in interest over the life of the loan.

4. Fees

Personal loans may include certain fees in addition to interest charges. Some lenders may charge an origination fee for processing your loan. The origination fee could be 1% to 10% of the loan amount. Some lenders may also charge an application fee to review your loan request.A financial institution or private lender may charge prepayment penalty fees if you choose to pay your loan off early. This can occur if you repay your loan in full before the repayment term ends. Lenders expect borrowers to repay their loan obligations in accordance with the terms and conditions of the loan agreement. A lender may charge late fees if it receives a monthly payment after its due date. Some lenders may charge a nonsufficient funds fee, also known as a returned check fee, if your checking account has insufficient funds to cover a monthly payment.

What Are Some Fees Associated With Closing Costs?

Here are some fees associated with closing costs:
  • Attorney fees. Attorney fees could be payable at the closing table if you hire an attorney that helps you navigate through the mortgage closing process.
  • Discount points. Homebuyers can pay discount points at the closing table to get a lower interest rate on the mortgage.
  • Government fees and taxes. Closing costs may include certain fees or taxes to a municipal or county government, including recording fees.
  • Origination fees. The lender may charge origination fees for processing your mortgage loan application.
  • Prepaid fees. These upfront costs at the closing table can include the initial payments for your homeowner’s insurance, mortgage insurance, and escrow fees.
  • Service charges. The lender may charge fees to cover the cost of certain services, including appraisals, credit reports, pest inspections, land surveys, flood determination services, and title searches.
  • Underwriting fees. The lender may charge underwriting fees for evaluating the risk of lending money to you.

When Does It Make Sense To Take Out a Personal Loan for Closing Costs? 

It makes sense to take out a personal loan for closing costs if it helps you finalize a home purchase without sabotaging your mortgage loan negotiations. As a consumer, you have to consider your own circumstances and do what’s right for you. A personal loan can provide you with a lump sum of money that you may repay over a period of time.Taking out a personal loan may make sense if you need the money for making a major purchase. Using a personal loan for closing costs may make sense if you can afford the twin burden of repaying the mortgage and personal loan debts.

Applying for a Personal Loan for Closing Costs

Applying for a personal loan to cover mortgage closing costs can be as simple as submitting an application with a financial institution requesting fast cash. Borrowers can use personal loans for almost any personal expense, including closing costs.Lenders may conduct a hard pull inquiry into your credit report when you apply for a personal loan, which can lower your credit score by several points. If you get preapproved for a mortgage loan and then apply for a personal loan, the mortgage company’s underwriters may reevaluate the risks and deny your application.When applying for a personal loan to cover mortgage closing costs, you may consider asking your mortgage loan officer whether that would be acceptable. Getting preapproved or prequalified for a mortgage doesn’t necessarily mean you’ll get fully approved if you bring new debt obligations to the closing table.

Alternatives to Personal Loans for Financing Closing Costs

Luckily, there are many personal loan alternatives if you do not want or cannot qualify for a personal loan for closing costs.
  • Down payment assistance programs. Look into down payment assistance programs on the Housing and Urban Development (HUD) website. You can search hundreds of programs by state, but keep in mind that most apply to first-time homebuyers only.
  • Borrow from a family member. Some lenders allow you to borrow money from friends or family members to cover the cost of closing. Make sure to check with your lender prior to making this arrangement. 
  • Use your tax refund. If you have a refund coming in, putting it toward your down payment or your closing costs is a great way to make use of the refund.
  • Borrow from your 401(k). This is not always recommended, but it could be your best option. Make sure to weigh the pros and cons of borrowing against your retirement account before pulling the trigger.

Personal Loan Rates

Getting preapproved for a mortgage and finding your dream home isn’t the end of the homebuying process. Most homebuyers will have to pay a variety of costs and fees at the closing table. Mortgage closing costs could be 2% to 6% of your home purchase price, and some borrowers may need help bankrolling these expenses.You could compare personal loan rates through Lantern by SoFi and explore your options. Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process of applying for a personal loan with the lender of your choice.

Frequently Asked Questions

Can you take out a personal loan to pay for closing costs?
What are the advantages of using a personal loan for closing costs?
Should you use a personal loan to cover closing costs?
What is the average loan closing fee?
Do personal loans have closing costs?
Photo credit: iStock/bymuratdeniz
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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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