You can afford the monthly payment for a mortgage. You just don’t have a down payment. Can you use a personal loan on a down payment for a house?
Could you use a credit card—or a cash advance?
In general, no. But there are other things that you can do if you need a down payment. We’re going to look at a few situations in which you might be able to use a personal loan for a down payment… and some of the less risky options.
Why Would You Take Out a Personal Loan for a Down Payment?
First, let’s explore why someone might want to take out a personal loan for a down payment.
Let’s say you’re trying to buy a $300,000 house. A traditional 20% down payment is $60,000.
You have a couple of options:
- Save the money in cash. But this can take a long time—in fact, so long that you might feel like it’s never going to happen.
- Use your retirement account or investments. Unfortunately, that does mean you will need to cash out your investments, a tall order in a down market.
- Get the money from your family. That presupposes you have family members who can give you such a substantial sum.
Saving up $60,000 is hard. So, most people go with an FHA loan instead. An FHA loan only requires 3.5% down (although you can put down more).
Now, for a $300,000 house, you need the following:
- $10,500 for the down payment.
- Around $3,000 to $6,000 for the closing costs.
That’s still a total of $13,500 at minimum. It can be tempting to borrow this money. You can easily get a personal loan for this amount if you have a good credit score.
But should you?
The personal lender will let you do it. But the personal lender doesn’t care what you do with the money. The mortgage company does. Conventional, standardized loans are now restricted to fairly rigorous regulations… because of the housing crash.
A Brief History of the Piggyback Loan
Before 2008, during the housing crash, it was common for banks to give out piggyback loans. You wanted a $300,000 house but couldn’t put anything down. You would get a traditional 30-year mortgage for $240,000 (80%) and a piggyback loan for $60,000 (20%). The piggyback loan would be another mortgage with higher interest.
What’s the problem with that? Well, again, the housing crash.
Lenders no longer like providing piggyback loans because it substantially increases their risk. First, you need to pay back a significantly larger amount every month. Second, you don’t have that much skin in the game. Since you didn’t put any cash down, it’s easier for you to walk away.
And Piggyback loans weren’t great for buyers, either. During the housing crash, most buyers ended up upside down in their home equity because they didn’t have any. When you borrow so much against a property (and limit your equity), you make it harder to sell the house… because you owe more than it is worth.
So, Will a Bank Let You Use a Personal Loan?
Conventional, FHA, VA, or any conforming loan will not let you borrow your down payment. Not only can you not use a personal loan, but you can’t use a cash advance or borrow money from friends or family. If you get money from friends or family for a down payment, it has to be a gift.
A bank will not let you use a personal loan for a down payment.
As with all things, there are a few loopholes. But this is an area where you can hurt yourself by being too clever.
A year ago, you took out a personal loan for $20,000—and the money has been sitting in your accounts ever since. The bank is not likely to question this money because it’s just been sitting there, so as long as you can afford the personal loan payments, they probably won’t care.
But it’s also not a good idea to purchase a house if you have that much outstanding debt (student loans are a little different; many people have them). Personal loans have much higher interest rates and faster repayment periods than mortgages. They can also adversely impact your credit.
It’s better to get a 0% or 3.5% down mortgage than to try to get some form of personal loan for your down payment.
Remember that your down payment exists primarily to show the bank that you’re serious about your purchase and financially responsible. Taking out a personal loan for your down payment doesn’t prove this.
Using a Personal Loan with Alternative Mortgage Programs
Some alternative mortgage programs will let you use a personal loan for your down payment. For instance, a bank statement loan, a hard money loan, or a seller-financed loan.
These mortgage programs aren’t backed by the government (like FHA, VA, or USDA loans) and aren’t generally provided through traditional mortgage lenders (like conventional loans).
Alternative mortgage programs have a few downsides. They generally won’t let you borrow as much, they have higher interest rates, and they may even need to be repaid faster.
Further, some options (like seller financing) may put you at a substantial disadvantage; for instance, you might need to make a large balloon payment at the end of the mortgage to keep the property or potentially forfeit it.
Alternative mortgage programs can sometimes be the answer for those with non-traditional income who don’t have a down payment ready. But for the most part, it’s better to wait until you qualify for a traditional low-down payment mortgage, especially as a first-time homebuyer.
Low Down Payment Loans
There are other options if you want to avoid the risks associated with alternative mortgage programs and personal loans.
A few low-down payment loans are available through the government, such as FHA, VA, and USDA loans. You can also check with your state housing authority or look into down payment assistance programs.
- FHA loans. The Federal Housing Administration (FHA) offers a 3.5% down payment loan. You’ll need a credit score of at least 580 and will have to pay private mortgage insurance, but you won’t need a traditional down payment.
- VA loans. Veterans Affairs (VA) real estate loans are available to active-duty military members, veterans, and their spouses. You’ll need a relatively solid income and financial picture, but you can get a VA loan with no down payment.
- USDA loans. The United States Department of Agriculture (USDA) offers a zero-down payment loan program for qualified buyers in rural areas. You’ll need a credit score of at least 640 for most lenders and meet other eligibility requirements.
If you have no down payment, consider a USDA loan. A USDA loan is for low-income and moderate-income families who want to live in rural areas. You may be surprised at what is a rural property in your area.
Down Payment Assistance Programs
Down payment assistance programs are available through state and local governments and nonprofit organizations. Generally, they’re only open to first-time buyers looking for a residential home loan.
These programs provide grants or loans to help with the down payment. They’re often need-based, so you must demonstrate financial hardship to qualify. But because programs vary by state (and sometimes even profession), you must do some research.
Down payment assistance programs will essentially “gift” you a certain amount toward your down payment. But they are very hard to find and harder to qualify for. Even if you find the right down payment assistance program, you may find it takes a while to qualify.
Personal Loans for Closing Costs
So, your down payment could be as low as 0% or 3.5%, depending on your loan product. But your closing costs will be another 1% to 3%. Maybe you’re in a situation where you can pay your down payment if you don’t need to deal with your closing costs.
Can you take a personal loan for closing costs?
Yes, you could. But again, it’s risky.
First, at least a few closing costs can be paid through credit cards. Appraisals, for instance. But the rest could be paid through a personal loan if your loan doesn’t push your debt-to-income ratio so high that you no longer qualify for your mortgage.
But you need to make your mortgage lender aware that you’re intending to do this.
Unlike a down payment, a mortgage lender won’t automatically decline your mortgage if you borrow your closing costs. But your mortgage lender can decline your mortgage if you remove an additional line of credit during the mortgage process.
Further, a personal loan could drop your credit score. It could drop your credit score enough to disqualify you from the mortgage or increase your mortgage rate. It’s almost impossible to predict what impact opening a personal loan will have on a credit score; it depends on your existing credit profile.
There are other ways to deal with closing costs, such as rolling them into your mortgage, that will ultimately be less expensive.
Personal Loans vs. Mortgage Loans
You likely wouldn’t want to even if you could take out a personal loan for your down payment. Personal loans will cost you a lot more than a mortgage loan, in general, especially in terms of your monthly mortgage payment.
The average personal loan has an APR of around 10%. But the average mortgage APR is still hovering around 6%.
A personal loan will likely have a shorter repayment period than a mortgage. So, while your monthly payments might be lower, you’ll pay more in interest over the life of the loan. Mortgage loans also tend to have much lower origination fees than personal loans. So, you’ll save money there, as well.
What About a Cash Advance?
Finally, recent years have made “cash advances” much more accessible. If you’re taking a cash advance out on a credit card, HELOC, or another type of credit line, you’re out of luck; again, this will be reported on your credit, and your mortgage lender will be suspicious about the money.
When buying a house, you should avoid touching your credit card as much as possible—even if you have the best credit card. Your credit card impacts your debt-to-income and is ultimately expensive money.
But what if you’re taking an advance against future income? For instance, what if you take a cash advance from your employer?
Depending on the lender in question, this is more of a gray area. Some lenders still count this as a loan. Other lenders will count it as income as long as it’s documented.
You shouldn’t rely on this type of funding to get your house. But you may want to ask your lender about it if you are truly trying to explore other options.
Conclusion: No—But There Are Other Options
A personal loan for your down payment is theoretically possible. But it’s risky and could cost you more in the long run. There are other, less risky ways to come up with the money you need for a down payment. Talk to your mortgage lender about what options are available to you.
Most mortgage lenders are more than willing to work with you to determine the best way that you can qualify for a loan. Very low down payment loans are available depending on the property you want.
Whatever you do, you should be open and honest with your lender. If you open a personal loan in the late stages of a mortgage, your lender will find out. If you borrow money from family and friends, your lender will see the deposits in your bank account.
Your lender can see your full credit report and credit history. So try to work with them, not against them.
Bottom line: You probably can’t use a personal loan as a down payment (unless you’re buying the whole house that way).
Taking out a personal loan for your home down payment is possible, but it’s risky. You would need to use an alternative lending product, such as a hard money loan (generally only for investors) or a bank statement loan (for those with self-employed or unpredictable income).
You generally cannot take a loan out for a down payment. However, low down payment mortgage programs are available, and you may qualify for down payment assistance if you find the right program.
If you need money for a downpayment, consider cashing out a retirement or investment account or asking your family if they can help. Alternatively, you can look into down payment assistance programs, but they can be difficult to qualify for.