Most of the time, personal loans are not used to pay for a house. But there may be some situations where not only is it possible, but it may be a better choice than a mortgage loan.
Getting a personal loan to buy a house
If you want to buy a typical single-family home, you should get a mortgage. Personal loans usually have shorter terms and higher interest rates than mortgage loans, which makes them a bad choice in this situation.
But if you want to buy a very small home or a mobile home, which are much cheaper, a personal loan might be a good choice. In fact, it can be hard to find a traditional mortgage lender who will lend you money to pay for a tiny house or a mobile home.
Some lenders offer personal loans that can only be used for a small house or mobile home. If you do this, though, keep in mind that it will be seen as an offer to pay cash. This means that you won’t be using the home as collateral for the loan, and the seller may be more likely to choose you because the sale isn’t tied to a mortgage process.
Can a down payment be paid with a personal loan?
If you need a traditional mortgage to buy a standard home, your down payment will usually be between 3% and 20%, depending on the lender and the situation.
Even though it might be tempting to use a personal loan to pay this amount, it will be hard to get the mortgage lender to agree.
The main reason for this is that a personal loan raises your debt-to-income ratio (DTI), which can hurt your chances of getting approved.
Also, it could be a sign that you can’t handle your money well, which mortgage lenders might see as a red flag.
Personal loans can be used for things like consolidating debt, paying for medical bills, starting a business, remodeling your home, or paying for a big expense.
How to Pay for a House in Other Ways
If you’re having trouble getting the money you need to buy a home, you have a lot of options, like loans, programs, and grants, that can help you reach your goal.
The U.S. Department of Veterans Affairs or the U.S. Department of Agriculture may be able to give you a loan with no money down if you are a veteran or if you buy a home in a rural area.
Some conventional mortgage lenders may accept as little as a 3% down payment, and the Federal Housing Administration offers loans with a 3.5% down payment.
If your income is low or moderate, the nonprofit National Homebuyers Fund may be able to give you a grant.
You don’t have to pay back the grant, which can be worth up to 5% of your loan amount and will help you pay for the down payment.
You can also check to see if your state has programs that help with the down payment.
The Effects of a Personal Loan on Credit
Personal loans can be a good way to buy a small house or mobile home, but you should know how it might affect your credit.
When you apply for any kind of credit, your credit score can drop a few points when the lender does what’s called a “hard inquiry” on your report.
Still, most inquiries don’t have a long-term effect on your scores.
How you handle your monthly payments is the main way a personal loan affects your credit score.
If you pay your bills on time every month, it will look good on your credit report.
On the other hand, if you miss a payment or don’t pay back the loan, it can hurt your credit, even if you keep the house.
Setting up automatic payments could help you keep up with your loan payments.
If you do this, some lenders may even cut your interest rate.
You could also set up reminders to let you know every month when your payment is due.
Before you apply for a loan, check your credit.
No matter what kind of loan you plan to use to buy your home, you need to make sure your credit is good enough to get good terms.
Check your credit score to see where you stand and see if there are any problems you need to fix before you apply.
Even if your credit score isn’t great, you might still be able to get a loan.
But your chances of getting a lower interest rate go up as your score goes up.
And just like any other loan, make sure you compare rates from different lenders to get the best one.