Using a Personal Loan as a Downpayment on a Home

Making the downpayment on a home can be the most difficult part of the closing process. Homeowners often struggle to afford a downpayment, and currently many hopeful homeowners are not able to afford it. One option to cover the cost of a downpayment is to use personal loans, but this can be quite risky. What are personal loans, and how might one use them to pay a downpayment?

An Overview of Personal Loans

Personal loans are taken out to lend out extra cash. They are often used to consolidate debt, cover an emergency, make home improvements, or even fund vacations. Furthermore, as short term loans, they last between 1-5 years. There are two types of personal loans:

1. Secured Loans
   • Secured loans are backed by either assets or collateral, such as your home or car. Using a secure loan saves money, but falling behind on payments or defaulting on the loan can result in losing your collateral. Both mortgages and car loans are examples of secured loans.
2. Unsecured Loans
   • Unsecured loans have higher interest rates compared to those of secured loans. They are not tied to any collateral or assets. Some examples of unsecured loans include credit cards and student loans.

Using Personal Loans as a Downpayment on a House

Many mortgage lenders do not permit customers to use personal loans to pay down payments. Using a personal loan as a downpayment is a dangerous financial choice. Personal loans provide cash needed for a downpayment, but taking this route creates two separate loans that you will have to pay off simultaneously. Taking this path is only an option for those with high income, little existing debt, a clear credit history, ample savings, and a proven rental history. Only those who have the financial means to keep up with both loans’ payments should consider this option. Guarantor loans or buying a home with no deposit are some of the safer alternatives you may want to consider.