The most hectic part of buying a home is raising funds for a down payment. Even if the mortgage lender wants you to make a 3% or 20% down payment, getting the funds is still not easy. So you may be tempted to take out a personal loan to pay the down payment.
However, lenders do not allow homebuyers to use personal loans for house down payments. Even if you get a lender willing to offer you the money, you may risk losing out on the mortgage.
Can I Use Personal Loans for a Down Payment on a House?
The straight answer is No. Conventional and FHA loans prohibit homebuyers from using other forms of loans for a home down payment. Besides, mortgage lenders prohibit applicants from taking out a personal loan to pay down payment. Furthermore, Fannie Mae and Freddie Mac regulations are against using personal loans as a down payment for houses.
Here are some key reasons why personal loans can't be used to pay a home down payment;
Mortgage lenders will not allow it.
Personal loans can be used for debt consolidation, daily expenses, and clearing any bills but not for buying a home. Most mortgage lenders under Fannie Mae and Freddie Mac regulations will not allow homebuyers to pay down payments by using another loan. Thus, it can be challenging to find a mortgage lender ready to receive a down payment from a personal loan.
Increases your debt-to-income ratio
Debt-to-income (DTI) ratio refers to the percentage of your monthly income used to pay off loans. Lenders use DTI to examine your ability to manage the monthly loan repayments. A good DTI to guarantee your loans should be below 36%. House down payments are usually large amounts, and if you take out a personal loan, you will have increased your DTI which lowers your chances of getting a mortgage approval.
You will end up with an expensive loan.
Suppose you pay the down payment with a personal loan and then get a mortgage. You will be repaying two loans at a time which is expensive. You may find yourself in an unending debt cycle.
How Can I Make a Down Payment on a House?
Mortgage lenders expect homebuyers to pay the down payment from their savings, gifts, investments, or retirement funds. If your savings are not enough, consider other alternatives such as selling some of your assets or borrowing money from your friends, parents, or colleagues.