Can You Use A Personal Loan For A Down Payment On A House? (2024)

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Can You Use A Personal Loan To Buy A House?

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What is a Personal Loan?

A lender grants a personal loan of a specific amount of money to an individual based on their creditworthiness. It’s often called an “unsecured loan” because it doesn’t require collateral to secure the loan and guarantee repayment. How a borrower uses the loan is up to their discretion, and they must meet their monthly payment requirements for the duration of the term.

Because personal loans are granted based on creditworthiness, having an excellent credit score is a great way to get the best terms, including the lowest interest rates. For more details, check out our blog post on what personal loans are and how to get one.

What Can Personal Loans Be Used For?

The great thing about a personal loan is that the borrower essentially decides how to use it. Common personal loan uses include funding a vacation or even simply building credit. So, whether you need a new computer for your home office or you want to consolidate debt, a low-interest personal loan from CU SoCal could be right for you.

Using a Personal Loan To Buy A House

If you’re wondering, “can I take a personal loan to buy a house,” the answer is yes – but it’s probably not a good idea. While it’s technically possible to buy a home with a personal loan, it may not be as good an option as a traditional mortgage.

Why? Because personal loans tend to come with higher interest rates than mortgage loans. Accordingly, using a personal loan to buy a home may lead to much higher monthly payments.

Personal Loan as a Down Payment

If personal loans aren’t ideal for purchasing a home, can you get a personal loan to make a down payment instead? Maybe, though it may not be as straightforward as you’d hope. A down payment is usually around 3-20% for a typical single-family home. Depending on the actual dollar amount, you might be able to take out a personal loan to cover it, but that option isn’t without some downsides.

Most banks will not accept a personal loan as a down payment on a house because it indicates that you might not be the most reliable borrower. Taking out a personal loan also increases your debt-to-income ratio, or DTI.

To get this number, divide your gross monthly income by your monthly recurring debt. The lower your DTI, the better. Taking out a personal loan raises that number, indicating to banks that you might not have enough income to stay on top of payments.

Other Home Buying Options

Just because a personal loan isn’t ideal for paying for a house doesn’t mean that you are out of options, even if a traditional mortgage loan isn’t in your cards. There are a few different alternatives to a personal loan for buying a home.

Government Agency-Insured Loans

It’s possible to take out a loan insured by the Federal Housing Administration instead of a loan from a bank. The minimum down payment required is 3.5% through the FHA. Other government agencies, like the Department of Veterans Affairs and the Department of Agriculture, don’t have any requirements for a minimum down payment. There are specific conditions for taking out a loan with these agencies, so make sure you satisfy them before applying.

Secondary Loan Programs

Secondary loan programs vary from state to state, so you could find a great option to fund your down payment depending on where you are buying a home. Occasionally, the program will also cover closing costs as well. The California MyHome Assistance program, for example, offers secondary loans to state residents.

Down Payment Grants

Unlike with a loan, the recipient of a grant doesn’t need to pay it back. However, there are some stipulations to qualifying. Generally, down payment grants are offered up to 5% of the home cost and are only available to low or middle-income homebuyers. To receive a down payment grant, you’ll need to provide proof of the loan amount and your income.

How Personal Loans Can Affect Your Credit

Whether you’re taking out a personal loan to cover home renovations or pay for a wedding, you will need to know how personal loans affect your credit.

Whether a personal loan lowers or raises your credit score depends mainly on your ability to pay it back. The initial credit check you must go through when you first apply will lower your credit score a small amount.

But when you successfully make on-time payments each month, your credit score will increase because you’re proving that you are a reliable borrower and can manage your money. However, when you close your loan account, your credit score may drop again slightly.

Don’t worry too much about this – your score won’t drop dramatically, and by paying off the loan on time, your creditworthiness will increase, making future loans even easier to take out.

Where to Get a Personal Loan

No matter what you want a personal loan for, you have lots of options when it comes to choosing a lender. As you shop around, make sure to look at the lender’s interest rates, fees, penalties, and term options. Here are the most common places to get a personal loan.

Bank

Banks are generally an excellent first stop when you’re looking for a personal loan. Chances are you already have a bank account, so applying for a loan from the same institution is highly convenient. They’ll already have much of your personal and financial information, so there may be less paperwork to do.

However, keep in mind that traditional banks usually have higher credit score and income requirements than other lenders. They also take much longer to release funds to you after approval. Be sure to ask how long the process usually takes before you apply, so you aren’t waiting too long.

Credit Union

Because credit unions are not-for-profit, Members get to take advantage of lower interest rates than you’d see elsewhere. Terms tend to be more flexible and fees lower. Specifically, at CU SoCal, we don’t charge our Members any fees on personal loans. Becoming a Member is fast and easy, so taking the extra step to join is well worth it.

Online Lender

Online lenders are a growing option for personal loans, but they aren’t suitable for everyone. There’s a distinct lack of personalized service with an online lender since you have to apply for, manage, and make payments only through the internet. Reaching a person to talk to can be difficult.

Additionally, online lenders often have higher interest rates on personal loans, so take care to compare different online lenders and make sure you understand all the loan terms.

CU SoCal Personal Loans

Getting a personal loan is a great way to help you afford the things in life that you need – or want. At CU SoCal, we offer personal loan financing from $500 to $30,000 so you can fund your life the way you want to live it. We never charge any fees or prepayment penalties on personal loans, so your money stays yours.

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