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One of the hardest parts of buying a home can be coming up with the down payment.Forget about rustling up enough for the 20% deposit lenders traditionally like to see. Even the minimum 3% to 5% deposits required for some conventional loans could be out of reach these days, when the average home sales price in the U.S. is currently about $503,000, according to the most recent information from the Federal Reserve Bank of St. Louis. Buyers who’ve done their research on mortgages — and are confident they can afford the monthly payments for the home they want to purchase — may wonder how they’ll ever manage to put together enough money to get to the closing table.Some buyers might consider applying for a personal loan as a way to get that upfront cash. But at the same time, they might also wonder, will a personal loan affect my mortgage application?Getting a personal loan before buying a house has both pros and cons. Not only that, it isn’t always possible to use a personal loan for a down payment on a house.
What Is a Personal Loan?
There are some key differences when it comes to mortgages vs. personal loans. A personal loan is a type of installment loan that can be used for many purposes, from consolidating debt to making a major purchase like a car or a piece of land. A borrower receives a lump sum of money and is expected to repay the debt in fixed monthly payments, usually with a fixed interest rate, by a predetermined date. The annual percentage rate (APR) on a personal loan can vary depending on the lender, the borrower’s credit, and several other factors, including the length of the loan. You can research rates and other costs and benefits of personal loans.If you have a good credit score, a personal loan may be a reasonable way to cover a financial need. When you take out a personal loan, though, it can affect your credit score and your ability to borrow money in the future.Recommended: Average Personal Loan Interest Rate
Can a Personal Loan Affect Your Chances of Getting a Mortgage?
As a would-be homebuyer, you may be lying awake at night with all kinds of questions running through your head, such as: Will a personal loan affect my mortgage application? Or, should I even think about getting a personal loan before buying a house? To answer these questions, it helps to know more about what the mortgage process entails.When you apply for a mortgage, you can expect the lender to thoroughly check your income sources, your credit scores, and your overall credit report to be sure you’re able to responsibly manage the loan. Since you’ll likely be borrowing hundreds of thousands of dollars, the mortgage company will want to be sure there aren’t any red flags that might signal a lending risk. Here are some things the lender could consider and how using a personal loan to buy a house could affect your mortgage application:
Your Debt-to-Income Ratio
One important measure your lender will want to check is how much of your monthly income goes toward making your monthly debt payments. This percentage is known as the debt-to-income ratio (DTI).The formula for calculating your debt-to-income ratio is as follows:Total monthly debt payments / gross monthly income = DTIGetting a personal loan for a down payment on a home means you’ll be adding to your total debt, which can increase your DTI. Though your DTI doesn’t affect your credit scores, it can be a big factor in determining if you qualify for a mortgage. You might be able to get a mortgage with a DTI of 45%, and some loan programs allow a DTI up to 50%. But when it comes to checking your borrowing bona fides, the lower your DTI, the better. A DTI of 43% is considered good, and 36% or lower is considered excellent.
How You’ve Managed Your Debt
Of course, the mortgage company will also want to know how well you’ve been managing your debt, so your credit report will be thoroughly reviewed. You can expect the lender to check your payment history to see if you’ve been paying your bills (e.g., student loans, car loans, credit cards, and other consumer loans) on time.Even if you’ve been paying consistently, the lender also will check your credit utilization ratio to see how much of your available credit you’re currently using. If you’re creeping too close to maxing out your credit cards, or if you have a large outstanding balance on an auto loan, you may appear to be a risk. Most lenders prefer borrowers who keep their credit utilization ratio under 30%.The lender also will be able to see if you’ve recently applied for new debt — including a personal loan for a mortgage down payment. If you can’t afford your down payment without help, it could be taken as a sign that you aren’t ready for the kind of long-term commitment a mortgage requires. A mortgage loan officer could view the personal loan application as a red flag.Recommended: Loan Officer vs Loan Processor: Which is Better?
3 Steps to Take to Increase Your Chances of Getting a Mortgage
Your goal when applying for a mortgage is to show that you’re a responsible borrower. So it can be a good idea to take the following actions:
1. Check Your Credit Report
Review your credit reports and make sure they’re as pristine as possible before you shop for a lender, apply for a mortgage, or broach the subject of using a personal loan to help with your down payment. You can get free copies of your credit reports from each of the three major credit bureaus through AnnualCreditReport.com. If there are any errors, or if you can see your creditworthiness is a little shaky because of past financial mistakes, you can take the necessary steps to clean things up.
2. Strengthen Your Credit
Remember, the better your credit is, the better the odds that you’ll be able to qualify for a mortgage with a low down payment. If you have at least 3% of your purchase price saved (that’s $12,000 for a $400,000 home), you may not need such a large personal loan and perhaps you can go with something smaller.
3. Use the Same Lender
As you contemplate will getting a personal loan affect getting a mortgage?, another strategy to consider is sticking with the same lender for both. Lenders might look more kindly on using a personal loan as a down payment if you’re getting both your mortgage and the personal loan from them. Recommended: How Much Can You Borrow With a Personal Loan?
Is It Possible to Use a Personal Loan as a Down Payment?
If you can qualify for a personal loan, you typically can use the money for anything you like (unless your loan agreement states otherwise). The real issue is, will your mortgage lender accept a down payment that’s paid for with a personal loan? And the answer is, some lenders do, and some don’t.
Why Don’t Some Lenders Accept Personal Loans for Down Payments?
If the mortgage is a conforming loan, it needs to meet specific guidelines set by Fannie Mae and Freddie Mac. This means you won’t be allowed to use a personal loan as a down payment, as those government-sponsored institutions don’t allow it. Even if your loan is not a conforming loan, lenders may still discourage using a personal loan as a down payment because it raises your debt‐to‐income ratio, may violate underwriting rules requiring “seasoned” funds, and often carries higher interest than your mortgage, ultimately reducing your borrowing power and increasing costs.
Pros and Cons of Using a Personal Loan as a Down Payment
As with most financial decisions, there are benefits of personal loans as well as drawbacks. If you’re thinking about getting a personal loan before buying a house, here are the pros and cons of using a personal loan as a down payment.
Pros of Using a Personal Loan as Down Payment
There may be less stress about saving up for a big down payment. Not worrying about where your down payment funds will come from may simplify the home-buying process.
You won’t have to tap into your savings account or your retirement fund to get the money for a down payment. You can compare personal loans to find the best rates and terms you can qualify for.
Cons of Using a Personal Loan as Down Payment
Some lenders may not allow borrowers to use personal loans for a mortgage down payment. And those who do may still turn down your application if they see it as a sign that you aren’t ready to make such a big purchase.
Your mortgage options may be limited to lenders who allow you to borrow the down payment.
You’ll have two payments — personal loan and mortgage — to worry about after you close on your new home.
Pros
Cons
Less stress and anxiety about saving up for a down payment
Some lenders may not allow personal loans for mortgage down payments
No need to take money from your savings account or retirement fund to come up with down payment funds
Could limit your mortgage options and lenders who will work with you
You’ll have an extra payment to make each month — the mortgage payment and the personal loan payment
Other Mortgage Options
If the challenge of putting together a large down payment is keeping you from buying a home, you may want to focus on the types of loans that require little or no money down. Here are a few of the alternatives available:
FHA Loans
Loans backed by the Federal Housing Administration (FHA) require only a 3.5% down payment and a credit score of 580 or higher. (Borrowers with credit scores as low as 500 may qualify for an FHA loan with a 10% down payment.) That’s not the only source of upfront savings, either. FHA loans allow sellers to pay up to 6% of the loan amount to cover the buyers’ closing costs. (Sellers can only pay up to 3% on conventional loans.)Also, because FHA loans are backed by the federal government, the interest rates are generally lower than the average rates for conventional mortgages.However, the FHA requires all borrowers to pay both upfront and annual mortgage insurance premiums regardless of the down payment amount. An FHA mortgage insurance policy is designed to protect lenders in case a borrower defaults on a loan.
VA Loans
VA home loans are provided by banks and nonbank private lenders, but because the U.S. Department of Veterans Affairs guarantees a portion of the loan, those lenders are able to offer more favorable terms. The VA doesn’t require a down payment, closing costs are limited, and VA borrowers aren’t required to pay mortgage insurance.Veterans, service members, and eligible surviving spouses can qualify. And this is a lifetime benefit, so it can be used multiple times.
USDA Loans
The U.S. Department of Agriculture has two lending programs for qualified homebuyers in rural areas: the Single Family Housing Direct Loan for low- and very-low-income families, and the Single Family Housing Guaranteed Loan for borrowers with a low or moderate income. Both USDA loan programs offer borrowers an opportunity to get a low-interest, fixed-rate home loan with no down payment.
Conventional Loans
Homebuyers who can afford a 20% down payment can avoid paying private mortgage insurance (PMI). According to a report by the National Association of REALTORS®, the median down payment for first-time homebuyers in 2024 was 9%. For all buyers, it was 18%.If those lower amounts still seem unreachable, there are conventional loans available with a lower down payment threshold — including some for as low as 3% down. You will, however, have to pay for PMI until you have 20% equity in the home.
Alternative Lenders
There are many lenders, both traditional and online, that offer mortgages with a low or even no down payment. They include well-known lenders like SoFi, Quicken Loans, Bank of America, and PNC Mortgage. You may want to see what these and other lenders have to offer when you compare loan offers, especially if you have a good or excellent credit score, which could help keep interest rates low.
5 Other Options for Financing a Down Payment
Besides looking for lenders who accept low down payments, it also may be useful to consider alternative ways to come up with the money you need. A few of those might include:
1. DPA Programs
Down Payment Assistance (DPA) programs, which are offered by nonprofit organizations as well as federal, state, and local agencies, are available to both first-time homebuyers and those who haven’t owned a home in the last three years. The U.S. Department of Housing and Urban Development website provides links to information about the DPA programs offered in each state.
2. Keep Saving
There may be ways to save up enough money for a decent down payment even in tight budgets. Earning income from a second job could be a good strategy, as can selling unwanted items to make extra cash. Earmarking tax refunds and gifted money as down payment funds can be a good start to this goal.
3. Piggyback Loan
A piggyback loan is pretty much just what it sounds like — a second loan that a borrower gets on top of a conventional mortgage in order to make a down payment that’s large enough to avoid paying PMI.The downside to this strategy is that you’ll end up with two new monthly payments to make toward your house instead of one.
4. Retirement Fund Loan
Another option may be taking a loan from your retirement account. Advantages to this strategy are that there won’t be a credit check and the loan won’t impact your credit score — even if you miss a payment. Another plus: Although you’ll have to pay interest on the loan, the interest will go back into your own retirement account — not to a lender as it would with a typical loan. But, of course, there is a downside. Until you pay back the loan, you’ll miss out on any market gains you might have gotten from your account, and you’ll lose out on the power of compound interest.
5. Gifts from Family Members or Close Friends
If you’re fortunate, a loved one may offer to give you the money you need for your down payment. There are restrictions on gifted down payments, though, depending on the home loan you get.
Risks of Jumping Into a Mortgage Too Soon
Taking out a mortgage to buy a home is a big commitment. Make sure you’re ready, and not simply getting carried away with the idea of being a homeowner. If your budget can’t afford the payments, you could risk going into debt or even defaulting on your loan.Remember, there are a number of other costs you’ll need to cover when you buy a house. For instance, you’ll have to buy homeowner’s insurance and pay property taxes. Plus, there is regular maintenance to keep up with. The costs can begin to multiply quickly. Making sure you are ready to handle the expenses and that you have the funds it takes could help set you up for success.
Viewing Personal Loan Rates With Lantern
Coming up with the down payment for a home purchase can be challenging, especially for first-time buyers. If you’re considering using a personal loan to get the money you need, it’s important to be certain that borrowing your down payment is allowed by your mortgage lender.If you decide that taking out a personal loan is right for you, Lantern by SoFi can help guide you through the process. By filling out one simple form, you’ll get offers from multiple lenders in our network to compare rates and terms so you can find the best option for your home-buying needs.
Frequently Asked Questions
Is a personal loan the same as a mortgage?
Can you put a personal loan into a mortgage?
Which is better: a mortgage or a personal loan?
Photo credit: iStock/FG Trade
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About the Author
Kim Franke-Folstad
Kim Franke-Folstad is an award-winning journalist with 30 years of experience writing and editing for newspapers, magazines and websites. Her work for SoFi covers a range of topics related to personal finance, including budgeting, saving, borrowing, and investing.
