A home is one of the biggest purchases any of us will ever make, and most of us see two options when it comes time to finance this purchase — make an all-cash offer, or take out a mortgage loan. If those options don’t appeal to you or neither is a feasible financing option, you may be curious about whether or not a personal loan can make your dreams of homeownership come true.
It’s not a common route to take, but you can technically buy a home with a personal loan. Keep reading to learn when you can use a personal loan to buy a house and when you should stick with a mortgage.
It’s much more common to use a mortgage than a personal loan to finance a home purchase. If you want to buy a single-family home, the reason for going with a mortgage loan is simple: You’ll likely need to borrow a decent amount of money. Personal loans tend to offer much smaller loan amounts than mortgage loans do.
That being said, if you plan to buy a small home in a low cost of living area or a mobile home, a personal loan may be an option as long as you’re prepared to pay it off in a timely manner — personal loans typically have shorter repayment timeline than mortgage loans (think one to five years instead of 30). If you want to purchase an inexpensive home or mobile home, there are lenders that offer personal loans designed to cover that specific type of purchase.
If you can pull off buying a home with a personal loan, there are some advantages worth considering. To start, your offer will be a cash offer which may be appealing to sellers (especially if you are competing in a seller’s market). Your home also won’t act as collateral for the loan so if you default on the personal loan payments, you don’t risk losing your home through foreclosure.
Can a personal loan be used for a down payment? If you want to use a personal loan for a down payment you’re going to have a hard time finding a lender who will accept a down payment that comes from a personal loan. Lenders won’t be happy with how much debt you already have thanks to that personal loan. Personal loans increase your debt-to-income ratio (DTI) which harms your odds of receiving approval for a mortgage loan.
If you need to borrow money to buy a home, it may not seem like it matters where that money comes from. Technically you can buy a home with a personal loan, but it may make your financial life more difficult to manage.
At first glance, personal loans can seem like a better borrowing product. Personal loans don’t have restrictions on how you can use them, whereas you can only use a mortgage loan to cover the costs of a mortgage.
While personal loans are much more flexible, they usually come with higher interest rates, shorter repayment terms, and smaller loan amounts than mortgage loans do. Because of this, if you use a personal loan instead of a mortgage loan to buy a house, you should expect to have a larger monthly payment, between the higher interest rates and shorter loan terms. You will need to budget carefully to make sure you are able to afford this higher monthly cost.
A mortgage loan is the standard choice when it’s time to finance a home, but it isn’t impossible to accomplish the same outcome with a personal loan.
These are some advantages and disadvantages worth considering before you take out a personal loan to buy a house.
In some unique circumstances it is possible and potentially even beneficial to buy a home with a personal loan (especially when you’re in a competitive housing market). In most cases, it’s going to be more feasible and more financially responsible to choose a mortgage loan that has a lower interest rate, larger loan amount, and longer repayment loan than a personal loan usually offers. The exception being if you plan to buy a fairly inexpensive home or an affordable mobile home.
If you are struggling to qualify for a conventional mortgage, a more lenient borrowing option like a VA loan, FHA loan, or USDA loan might be a better fit than taking out a personal loan. No matter what option you choose, the key is to take a good hard look at your budget to make sure you can afford taking this major financial step.
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