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

Written by Kim PinnelliReviewed by Nathan Brown, CFP®Updated: 8th Apr 2022
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If you don’t have money for a down payment, you might wonder if you can use a personal loan for a home down payment.

It can be done in rare circumstances, but we don’t recommend it. Here’s everything you must know.

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

Most lenders won’t allow you to use a personal loan for a down payment. Here’s why.

It defeats the purpose.

The down payment should be YOUR investment in the home. It’s money you put down and are willing to ‘risk’ when you buy the home. When it’s your money, you are more likely to do whatever is necessary to make your payments.

If you use loan proceeds to make the down payment, you don’t have any ‘skin in the game.’ The money you used is borrowed funds. If you can’t pay your mortgage, you won’t personally lose anything (except your home, of course), but there’s no financial recourse.

Why You Should NEVER Use a Personal Loan for a Home Down Payment

There may be a few rare instances where a lender allows you to use a personal loan for a down payment; here are four reasons you should never consider it.

#1. Personal Loan Interest Rates Tend to be High

Interest rates on personal loans are high. There’s no collateral backing them up, so lenders have to increase the interest rates. Those low mortgage rates you see everywhere aren’t nearly what banks charge for personal loan interest rates. If you’re paying high-interest rates on the down payment, you’re losing out on the investment you’re making in your home. In other words, it defeats the purpose.

#2. It Limits Mortgage Loan Options

Most mortgage lenders won’t allow a personal loan for a down payment. If it’s your only way to get down payment funds, you may have to shop around for lenders, and you’ll have limited options for choosing your loan program.

#3. 20% for a Down Payment Sometimes Isn’t Necessary

Too many people assume a 20% down payment is required and go to any length to get it, but it’s not. Most mortgage loans today don’t require a 20% down payment. You can get by with a down payment as low as 3.5% in most cases with FHA financing, and if you’re a veteran or a low to moderate-income family buying a home in a rural area, you may not even need a down payment.

#4. You Now Have More Debt to Manage

Taking on a mortgage is a big deal. It tremendously changes your budget. If you add a personal loan for your down payment to the mix, you add a lot of debt to your monthly budget that can overwhelm you quickly. What if you can’t afford the monthly mortgage payments?

Why put yourself in that situation? Instead, use funds you have or save to put your own money down and not risk dealing with another debt.

How to Get a Personal Loan for a Down Payment on a House

We don’t recommend using a personal loan for a down payment on a house. It’s not financially smart to borrow money to use as a down payment. But if it’s your only way and you don’t see any alternatives, here’s what you should know about getting a personal loan.

  • Shop around, so you get the best rates and terms (See best personal loans)
  • Pay attention to the fees; most banks charge origination fees that can increase your costs and decrease the amount you receive from the loan
  • Pay attention to the term (how long you have to pay off the loan)
  • Look at the loan’s bottom line – how much it costs overall to make sure it’s worth it

Alternatives to Using a Personal Loan for a Down Payment

The good news is there are alternative ways to get money for a down payment that doesn’t include taking out a personal loan. Here are the top alternatives to consider.

401(k) Loan

If you have a 401K, you might be able to borrow from it. We don’t often encourage this option, but it’s there.

When you borrow from your 401K, you can borrow up to $10,000 or 50% of your vested balance, whichever is the greater amount. However, you cannot borrow more than $50,000. The money is a loan you pay back to yourself, including interest.

But there’s a catch. If you leave your job, you must repay the loan by the current year’s tax filing date. If you don’t, you’ll get taxed on the funds as if they were an early distribution which means a 10% penalty and taxes at your current tax rate.

>> More: What Is a 401k Loan?

Down Payment Assistance Programs

Check with your local state and county departments, as many offer down payment assistance programs in the form of a grant. This means you don’t pay the money back; it’s given to you. The grants are only for certain demographics, so read the fine print to see if you qualify.

If you do, that’s money toward your down payment or closing costs, and you don’t have to pay it back.

Gift Funds from Family or Friends

If you have close family or friends that are like family that want to contribute to your home purchase, you can use them as gift funds. Don’t just accept the funds and use them. You must go through the proper steps with your lender.

Gift funds must be traced so the lender knows they aren’t a loan, and that repayment isn’t expected. The lender will want a letter from the donor stating that the funds are a gift and the reason for the gift. The lender will also need a paper trail of the funds’ origination and proof that the funds were delivered to you.

Save Up More Money

You could always wait to buy a home too. If you don’t have the money for a down payment, it could be a sign that you aren’t ready to own a home. If you wait a little longer, budget correctly, and save money, you could have the funds to put down and qualify for the loan yourself.

Home Equity Loan

If you currently own a home with equity (you owe less than the home’s value), you can tap into it with a home equity loan. This fixed-rate loan provides you with funds in one lump sum up to 80% of the home’s value minus any existing mortgages on the home.

A home equity loan has a low APR, fixed monthly payments, and easy qualifying terms. You can then use the funds to put down on your next home and use the funds you receive to sell your current home to pay off the home equity loan.

>> More: Best Home Equity Loans

Home Equity Line of Credit

A home equity line of credit is a spinoff of the home equity loan. You can borrow up to 80% of the home’s value minus any existing liens, just like a home equity loan. The difference is it’s a line of credit, which means you only owe interest on the funds you withdraw.

You can use the funds for your down payment, and the APR is adjustable. You only owe principal on the loan after ten years, and if you sell the home before then and pay off the loan, you never have to worry about it.

>> More: Best HELOC Lenders

FHA Loans

Consider an FHA loan if you’re trying to avoid a personal loan for a down payment. You need just 3.5% down on the home, which means $3,500 for every $100,000 you borrow. That’s much easier to accomplish than if you needed 20% down. FHA loans have flexible underwriting guidelines, and they allow gift funds if you don’t have the full amount yourself.

>> More: Best FHA Loan Lenders

VA Loans

VA loans are an option for veterans or surviving spouses of veterans. You don’t need a down payment if you’re eligible for a VA loan. This means the only funds you need to worry about are the closing costs, but even those are limited, and you can get help covering them from the seller or wrap them into your loan.

>> More: Best VA Loan Lenders

USDA Loans

USDA loans are loans for low to moderate-income families buying in a rural area. You might be surprised at how the USDA qualifies ‘rural,’ though. You aren’t living in the middle of anywhere – just outside urban areas, which can sometimes mean right outside the city lines.

The nice thing about USDA loans is you don’t need a down payment. You can put nothing down and cover the closing costs, which are low for this loan program.

Can I Buy a House If I Have a Personal Loan?

If you have a personal loan and you just took it out to use for your down payment funds, your options will be limited for mortgage financing. Most lenders won’t let you use the funds. But, if you have a personal loan for other reasons and you can prove it, or you’ve had it for quite a while, then it probably won’t stand in your way unless it raises your debt-to-income ratio too high, or you have a bad payment history on it.

Can You Use a Personal Loan for FHA Down Payments?

The FHA doesn’t allow borrowers to use a personal loan for a down payment on an FHA loan. They want borrowers to use their own funds or gift funds but never borrowed funds.

Bottom Line: Can You Use a Personal Loan for a House Down Payment?

You might find a lender here or there that will allow you to use a personal loan for a house down payment, but it’s rare, and we don’t recommend it. Borrowing money to put down on a house is bad financially. You’ll put yourself in over your head in debt before you even hold the keys in your hand. It’s best to wait until you have the money yourself and can afford the costs.

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Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.