Can You Use a Personal Loan for a Home Down Payment?

The hardest part of buying a home is making the down payment. Whether your lender allows 3% down or you're hoping to get 20% to reduce your monthly payments and avoid mortgage insurance, accumulating all that money isn't easy for most people. Can you use a personal loan for a down payment? Using a personal loan for a down payment may seem a great solution, but it won't work for most mortgage lenders. Here's what you need to know.

Using a personal loan for a down payment on a house is a bad idea.

Even if you take out a personal loan and deposit funds a few months before applying for a mortgage, issues will negatively impact the mortgage application process.

The biggest one is your ability to qualify for a mortgage loan.

One of the criteria that mortgage lenders look at is your debt-to-income ratio, commonly referred to as "DTI." This is your new house payment plus recurring obligations divided by your stable monthly income.

Recurring liabilities include monthly payments for:

  • child support or alimony;

  • credit cards;

  • car loans;

  • fees for other immovable property owned;

  • other loans.

If your regular monthly income is $5,000, your new home payment is $1,200, and you have $800 in recurring non-housing obligations, your DTI is 40% ($2,000/$5,000 USA). If you exceed 50%, your loan may be rejected.

Check this video to find out more.

Where to get a personal loan

No matter what you want a personal loan down payment for, you have many options when choosing a lender. Check out the interest rates, fees, penalties, and lender terms options as you shop. Here are the most common places where you can get a consumer loan.

Can you get a loan for a down payment in Bank?

Banks are a great first stop when looking for a personal loan. They will have most of your personal and financial information, so there may be less paperwork. If you already have a bank account, applying for a loan at the same institution is very convenient.

Remember that traditional banks generally have higher credit ratings and income requirements than other lenders. They take much longer to provide funds to you once approved. Ask how long the process usually takes before you apply so you don't have to wait too long.

Can you take a loan out for a down payment in Сredit Union?

Because credit unions are non-profit, members can take advantage of lower interest rates elsewhere. Terms are generally more flexible, and fees are lower. At CU SoCal, they do not charge members any fees for personal loans. 

Can I get a loan for a down payment from Online Lender?

An online lender lacks a personalized service as you only need to apply, manage and make payments online. Online lenders often have higher interest rates on personal loans, so compare different online lenders and ensure you understand all the loan terms.

How to make the proper down payment

For most mortgages, you need to make a minimum down payment of 3% to 5% of the property's purchase price. For a $200,000 home, a 3% down payment would require $6,000. At 5%, the requirement would be $10,000. 

The best way to make that down payment is to save money for a year or more before applying for a mortgage.

If you are a veteran, you can apply for a VA mortgage. These loans provide 100% financing, eliminating the need for a down payment.

Traditional and Roth IRAs

Under IRS rules, you can withdraw up to $10,000 with a traditional IRA without paying an early withdrawal penalty. You will have to pay regular income tax on the withdrawn amount.

If you have a Roth IRA, you can withdraw the amount of your contributions to the plan without paying taxes or early withdrawal penalties. Both ordinary income tax and an early withdrawal penalty will apply to any portion of investment income withdrawn.

Gift from a family member

If you received a gift, you need to provide the following documents:

  • A fully completed gift letter, signed by the giver, states the amount of the gift, the source of the gift, the giver's relationship to you, and that the gift is not a loan that will require repayment.

  • The donor may be required to prove they have the means to give the gift.

  • Evidence of funds transfer before closing.

Down payment assistance programs

Many states and cities provide assistance programs to local homebuyers. You need to qualify as a low-income borrower. However, the rules vary from one program to another.

Assistance with a down payment can be in the form of a public gift or a loan. When set up as a loan, the debt is usually forgiven after you've made timely payments for several years.

The loans will serve as a down payment, typically connected to an FHA mortgage. FHA mortgages require borrowers to make a down payment of 3.5% of the home's purchase price. FHA-approved down payment assistance programs will be allowed to provide down payment funds.

Alternative loans for borrowers without a sufficient down payment

Mortgage lenders do not allow down payments from unsecured loans such as personal loans and lines of credit. But they allow loans from secured sources. If you already own one property, you can take a loan against it and use it to make a down payment on a new home.

Another source is pension plan loans. Employer-sponsored plans allow taking 50% of your plan share for up to $50,000. Since your pension plan secures the income, it will be resolved by the mortgage lender.

You can obtain secondary financing for the house you are purchasing. Let's say you plan to take out an 80% mortgage on your new home. If you qualify based on income, the first mortgage lender may allow you to take out a second mortgage for an additional 10% or 15% of the purchase price. It will significantly reduce your down payment.

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