Homebuyer FAQs on Personal Loans and Down Payment Options
Updated: Feb 28, 2022
If you're trying to make a down payment on a house and you're looking at personal loans, then you surely have a lot of questions on your mind about the right way to go about things. Read on for answers to some of the most common questions you might have.
Can You Use a Personal Loan for Your Down Payment?
While there are banks that do offer down payment loans, it depends on the exact type of loan you're getting. Personal loans cannot be used as a down payment if you are opting for FHA or conventional loans.
Lenders will require you to have a certain amount of cash in your bank account to supplement any loans you'll make because they will estimate whether or not you can afford the mortgage. When it comes to calculating risk, they will look at your debt-to-income (DTI) ratio and likely mark a personal loan against approval if you aim to use it for your down payment.
Are There Other Loans You Can Use for a Down Payment?
Although it may be better to save up for at least a 6% down payment, you do have other loan options that could work. For instance, USDA loans won't require a down payment.
If you're set on an FHA loan, then you will still need to have a down payment on hand, but it will come at a lower rate (usually around 3.5%). Alternatively, U.S. service members and their spouses may be eligible for a VA loan, which nixes the need for a down payment.
Can You Borrow Money from a Personal Contact?
If you have a personal contact who will be lending you money, then you can possibly forego lenders or bank financing. Of course, you will have to establish whether this money is a loan or a gift.
Lenders will ask for a gift letter signed by all parties if the money is meant to be a gift. If it's a loan, then you will also need to settle repayment terms and interest on paper to minimize disputes. Take note that this will still be calculated as part of your DTI ratio.
Will a Loan Affect Mortgage Approval?
Even if you don't use them for your down payment, keep in mind that personal loans will result in a slight dip in your credit score. If you are still undergoing the pre-approval process for your mortgage, this will affect your application.
Lenders will take that into account when determining your eligibility and risk level.
What Other Methods Can Help With Down Payment?
If you really need a little help with down payment and you don't have the time to wait until you can scrounge up more funds, then you can try to seek out assistance programs.
Each state has local home buying programs for this express purpose, and you can also seek out national fund programs for aspiring homebuyers. You can usually get up to 5% should this method pan out for you.
If you decide to go through with your loan, it is better to carefully assess the various options out there and choose a lender that can work within your parameters. With this information, you should be able to make a more informed decision.
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