If you’re planning to buy a house, down payment might be one of the biggest problems you have to overcome. Providers most usually ask for as much as 20% down on conventional mortgages or will have you purchase private mortgage insurance, which is quite costly.
You might then consider a $23,100 personal loan to pay the upfront cost. Let’s figure out when it is a good idea, and when – not so much.
Can You Cover a Down Payment or a Home Loan with a Personal Loan
Yes and no. Sure, most lenders don’t prohibit you from using your personal loan as you please, including paying for a downpayment, but mortgage companies do. They would often even look through your credit reports over the past year or so to be sure that you didn’t take out a personal loan. It’s only logical on their part because mortgage providers need to know that your financial situation is stable enough to take on a large amount of debt. And if you already have more to pay off, it makes you a risky client. If you have a bad credit history though visit Bad Credit Loans in Kentucky for more info.
And even if the mortgage company will allow you to take out a personal loan to fund a down payment, it doesn’t mean that you should. Usually, the disadvantages way outweigh the advantages of such an affair for a number of reasons:
- Your credit score suffers. Because each time you apply for an online loan, a lender makes a hard credit inquiry that shows up on your report and lowers your credit score, therefore making it harder for you to qualify for good rates and terms.
- Your debt-to-income ratio goes up. DTI shows how much debt you have to pay and essentially your ability to pay it off, which interests most of the lenders. If this ration is high, a lender will think twice before accepting your application, and if it’s over 43% most mortgage companies would shut their doors on you.
- Your monthly payments become larger, which means less money to spend. And if you can’t pay off both payments, your credit score will be ruined, and you’ll risk losing your property.
When Is It a Good Idea to Take Out a Personal Loan
There’re only a couple of extremely rare situations when an emergency personal loan can be safely used to fund a down payment:
- You’re waiting for a significant sum of money, that you know will be enough to cover if not all but most of the expenses, but are obliged to have an offer on the property right now. In such a case, a personal loan might help you get your dream home in time, even before you receive the funds for it.
- You have a job that is secure and high-paying but requires you to move places. In this scenario, you will be able to pay off your personal loan first and then afford your mortgage payments while working.
Still, we recommend resorting to taking out a personal loan only if you have minimal monthly debt obligations and excellent credit history.
Alternative Ways to Afford a Down Payment
If you feel discouraged that a personal loan wouldn’t be able to solve your problems with a down payment, below is a couple of alternative ideas that might help you:
- Get a mortgage with a lower down payment. There’s a variety of options that don’t cost as much as conventional mortgages. For example:Federal Housing Administration mortgages can be as low as 3.5%, and therefore more affordable, even considering the mortgage insurance premiums that come with them.
HomeReady program that offers down payments from 3% and up. You’ll have to complete a homeownership course, have a credit score that is higher than 620 and meet some other requirements to qualify.
VA mortgages are available for you if you’re a veteran. Many loans for veterans can cover the full cost of your new property and you won’t have to pay a cent upfront.
The US Department of Agriculture home loans are available for the rural area residents. You might be able to choose between Guaranteed Home Loans and Direct Home Loans, neither of which requires a down payment.
- Make use of one of the down payment assistance programs that can provide a grant for you to cover the upfront costs of your home loan. The US Department of Housing and Urban Development might be a good place to start your search for a suitable grant.
- Get help from a family member or a friend. Many are embarrassed to ask for help, and borrowing from a friend can be risky for your relationships, but sometimes it’s a much safer option. You can even use particular services to make the deal official to take some pressure off the relationship with a lender.
- Apply for a 401(k) loan if there’s enough money in your retirement account, and you’re secure in your job. Do your research on this type of loan prior to signing any documents though, as you might end up losing your savings to taxes and fines.
- Take out two mortgages at once – the first one will cover about 80% of the cost on your house, then you can make a down payment of 10 % and then borrow again, having a second mortgage worth 10% of your property value. This way you can avoid paying mortgage insurance that can cost you quite a lot.
- If you have bad credit – check out Bad Credit Loans in Louisiana to find something suitable.
Before taking out a personal loan to afford a down payment carefully consider all of the other, less risky and costly alternatives. If you are in an emergency situation – view all of the documents very thoroughly and try to get the best deal possible. Sometimes it’s even better to hold off an offer than sign up for a questionable loan.