Buying a home is usually the most finance-intensive undertaking for most people, with most depending on mortgage loans to pay for their homes. However, most mortgage loan providers require that a home buyer pay a 20% deposit before accessing a mortgage loan.
Typically, people will save up to raise a home down payment. However, it is not always possible, so some people may consider using a personal loan as a down payment.
But before you take a personal loan as a down payment, you have to understand how taking the loan can affect your ability to access a mortgage loan.
Can I Use a Personal Loan for a Mortgage Down Payment?
Typically, you cannot use a personal loan to pay for your mortgage. Conventional and FHA mortgages prohibit the use of personal loans for the payment of the down payment. The reasoning behind disallowing the use of a personal loan to pay for a home down payment is that lenders want to see that you are putting your own money into the purchase but not borrowing all.
Also, having enough savings to pay the down payment demonstrates your ability to service your loan and that you will not have too much debt that could make it difficult for you to service a mortgage.
There are situations where some lenders may allow you to pay for the down payment using money acquired through a personal loan. But even then, it may not be a good idea because a personal loan can be relatively expensive, with interests of between 4% to 36% depending on your credit rating.
Many personal loan providers also won’t lend you a huge amount; for example, My Quick Loan offers Personal Loans up to £5,000. Their rates start from 12.9% APR and go to 1721% APR with a minimum Loan Term of 3 months and a maximum Loan Term of 36 months. For example, if you borrow £1,000 for 18 months, you will be paying back £1570.44. Those loans are great if you need the cash quickly, but they are not suitable for a down payment.
Accessing Cheap Personal Loans
If you have exhausted other options and your mortgage provider allows personal loans for a home down payment, it is okay to take a personal loan. However, you must shop for the best personal loan deals to avoid bad debts.
You want to consider several things when applying for a personal loan. The first consideration should be the loan’s annual percentage rate (APR). APR refers to the total cost of the loan per year with fees included. Also, you must consider how much you need to pay for the loan per month to determine if you can afford it and the mortgage at the same time.
Choosing a lender from the thousands of lenders in the market can be challenging. If you are unsure which lender to pick, you can opt for a SoFi personal loan that offers attractive low rates and no fees.
Other Options for Financing Your Down Payment
If your mortgage provider does not allow personal loans for down payment financing, you can look to see if they have an option for lower down payments. Some mortgage companies offer lower down payment rates but require the borrower to have private mortgage insurance (PMI).
The PMI covers the lender if you default on your payments and runs until you reach 20% home equity.
If you are a veteran or buying a house in rural America, you could access a mortgage without paying a down payment. For veterans, you can apply for a down payment free mortgage loan via the Department of Veteran Affairs. If you are buying a home in rural areas, you can apply for a mortgage loan through the Department of Agriculture without a down payment.
Personal loans are a great option for covering financial expenses such as hospital bills and consolidating credit card debts. But they are typically not allowed in mortgage down payments.
However, some lenders may allow it under some circumstances, but even if it is allowable, you should only use it as a last resort. And when you do, always ensure that you go for a loan that is the least expensive.