Buying a house is a big decision. It requires a big commitment. And unless you’re a multimillionaire, it’s pretty easy to assume that you won’t be paying cash. That’s why people obtain mortgages to finance their purchase. However, mortgages require down payments, usually in cash.
Down payments for traditional mortgages range from as low as 3% of the total value of the home to as high as 20%, may be even more if you’re willing to go higher. Coming up with even 3% of the down payment for a home purchase could be too much of a struggle for some. Because of this, people would opt for alternative financing options in order to come up with the needed amount. One alternative that people turn to is personal loans. But is it possible? Is it a good idea?
Is it possible?
Generally speaking, it is almost impossible to use a personal loan as down payment. Mortgage lenders don’t usually allow the use of personal loans for down payments as it defeats the purpose of the down payment contribution, which is to confirm your commitment to buying a home as well as show that you are able to afford the property. Obtaining a personal just to come up with a down payment raises an alarm that you are unable to afford the property and could signal that you will default on payments sometime in the future.
However, there are also some instances wherein a personal loan can be used as down payment. One of these instances is when your mortgage lender agrees to the loan, as long as you are able to prove that you are indeed capable of paying off your mortgage but you just have no other options as of the moment.
Is it a Good Idea?
Using a personal loan for down payments should only be a last option when all other alternatives are exhausted. This is because you will basically be paying for additional interest on top of the principal amount, along with the payments you have to make to pay for your mortgage. This could lead to paying for an even higher amount than you could have saved by choosing not to pay the down payment with your own money.
Additionally, obtaining a personal loan for use as home down payments requires you to have good to excellent credit scores just to prove that you are not a financial liability since personal loans are considered unsecured debt. They typically have shorter terms compared to mortgages and therefore could charge high monthly payments, with high interest rates.
Other disadvantages for personal loans as home down payments include increasing your debt-to-income ratio, which could also decrease your likelihood of securing a mortgage, lenders typically granting you lower mortgage amounts because of the loan, and lowering of credit scores due to the hard credit inquiries appearing in your credit report.