Credible takeaways
- Many lenders prefer your down payment to come from savings.
- Even if your lender happens to allow it, you generally shouldn’t use a personal loan for a down payment.
- Alternative funding options include loans with lower down payment requirements, gift money from family or friends, and down payment assistance programs.
- First-time homebuyers may be eligible for additional down payment assistance programs.
Homeownership is a goal for many people, but saving money for a down payment can be challenging. Depending on where you live, it can take an average of nearly nine years to save for a 10% down payment, according to data from Zillow.
If you’re strapped for cash, you may be thinking about alternative funding sources, such as a personal loan. But using personal loan funds for a down payment doesn’t fly with most mortgage lenders, and it’s not typically advisable anyway, for several reasons. There are alternatives, though.
Why you shouldn’t use a personal loan for a down payment
Using a personal loan for a down payment is generally not a good idea. Most banks and mortgage lenders don’t allow the use of personal loans to fund a down payment. And, taking out a personal loan increases your debt-to-income ratio (DTI) — the percentage of your pretax monthly income going toward your debt payments each month — which may affect your mortgage approval odds.
Most mortgage lenders prefer a DTI of 43% or less, and taking out a personal loan for a down payment would increase your debt burden. So, depending on your existing debt, an additional monthly payment could disqualify you from eligibility for a mortgage. Most lenders and banks prefer a down payment to come from your personal savings, and to have been "seasoned" there for at least two months.
Pros of using a personal loan for a down payment
The truth is that using a personal loan for a down payment generally lacks any meaningful advantages. Though it may seem like a good idea in theory, it generally doesn’t work due to limited lender acceptance and the loan's impact on your personal finances and DTI.
In many cases, your best option is to postpone homeownership until you save the necessary down payment amount, or look into specific types of mortgage loans that may have lower down payment requirements. You could also research down payment assistance programs in your area (especially if you're a first-time homebuyer) and seek gift assistance from family.
Tip
Check the definition for "first-time homebuyer" with programs in your area. For instance, some programs define it as someone who hasn't owned a home in three years.
Cons of using a personal loan for a down payment
Using a personal loan for a down payment has several disadvantages, including:
- Increases your DTI: Incurring debt by taking out a personal loan can increase your debt-to-income ratio, which lenders use to determine your eligibility for a mortgage and your loan amount. The higher your DTI, the riskier you look to mortgage lenders.
- The mortgage lender likely won’t accept personal loans: Using a personal loan for a home down payment is generally a nonstarter, since most mortgage lenders forbid the use of personal loan funds and will want to know the origin of any large deposits in your bank account. Accepted sources of funds may include cash from your checking and savings accounts, as well as cash gifts you receive from relatives or friends.
- Your credit score may go down: When you apply for a personal loan, it triggers a hard inquiry on your credit report, which can harm your score. Additionally, missing payments on your loan can lower your score, which is why it’s important to only take out loans you can afford. Keeping your credit score in the good to excellent range — a FICO score above 670 — will give you the best chances of mortgage approval.
- Higher interest rates: Even if a lender accepts personal loan funds for a down payment, you may be charged a higher mortgage interest rate. Lenders often view borrowers relying on personal loans for down payments as riskier and, therefore, charge more interest to offset the additional perceived risk.
Alternatives to using a personal loan for a down payment
As mentioned above, using a personal loan for a down payment is rarely (if ever) a good idea. Here are some alternatives to consider.
- Save up and pay with cash: Cash is king, including when it comes to down payments. A general rule of thumb is to save at least 3% of the price of your target home, but many lenders require 5% or more. The best way to make a down payment is with cash, that way, you don’t have to take out extra debt or pay interest. If you’re cash-strapped, it may make sense to hold off on homeownership until you build your savings. Creating a budget, cutting expenses, and boosting your income can help you save money faster.
- Consider loans with lower down payments: Some types of mortgage loans, including Federal Housing Administration (FHA), Department of Agriculture (USDA), and Department of Veterans Affairs (VA) loans, typically require lower down payments than conventional mortgage loans. With an FHA loan, you may be able to put as little as 3.5% down. USDA loans usually don’t require a down payment, and neither do VA loans, as long as the sales price isn’t higher than the appraised value of the home.
- Gifts from friends or relatives: Another option is to receive a cash gift from a loved one to cover the cost of the down payment. In the event a loved one decides to contribute financially, it’s important to note that they'll need to provide a gift letter to your mortgage lender that the money does not need to be repaid. The lender will scrutinize the amount of the gift, who gave it to you, and the nature of your relationship with them. Lenders may be less likely to lend if it’s not from a close family member or friend.
- Explore down payment assistance programs: Down payment assistance programs help many people achieve their dreams of homeownership. You can search for homebuyer resources by state on the Department of Housing and Urban Development’s website.
While personal loans can come in handy to pay an emergency expense, fund a home improvement project, or consolidate debt, they are generally not an option for a home down payment. Paying with cash and exploring lower down payment loans and assistance programs can help you achieve your goal of homeownership without taking on unnecessary debt.
Personal loan for down payment FAQ
How does a personal loan for a down payment affect my credit score?
When you apply for new credit, such as a personal loan, it results in a hard inquiry on your credit report. Hard inquiries can ding your credit score, especially if you have multiple in a short time frame. On top of this, most mortgage lenders do not allow personal loan funds to be used for a down payment anyway.
How to save for a down payment
The first step to saving for a down payment is to calculate how much you’ll need to save. A 2023 study by the National Association of REALTORS® found the median down payment on a home was 14%. Using this as a guide, if you wanted to buy a $250,000 home, you could aim to save $35,000. But if you're a first-time homebuyer, you may be eligible for programs that require a much lower down payments.
Once you know how much to save for the down payment, start stashing aside as much money as you can, preferably in an account that earns interest. When it comes to saving money, consistency is essential, even if you can only save a small amount each month.
How can I make a down payment on a house fast?
The quickest way to make a down payment on a house is to pay cash with money you have in a checking or savings account, or a cash gift provided by a friend or family member. If you don’t have the money right now, your best bet is to save up or explore down payment assistance programs in your area.
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