Often, the most challenging part of buying a home is coming up with a down payment. Whether your lender is allowing 3% down or youre hoping to hit 20% to reduce your monthly payments and avoid mortgage insurance, saving up all that cash isnt easy for most people. With the national average home price currently hovering around $270,000, according to Zillow, a 20% down payment would require you to save up about $54,000.
Thats quite a sum, and even the lowest possible down payment may feel out of reach for cash-strapped homebuyers. Using a personal loan to cover some or all of your down payment may sound like a great solution, but it wont fly with most mortgage lenders. Heres what you need to know about using a personal loan as a down payment—plus some alternatives that may be worth exploring.
Personal loans are a popular way for consumers to access financing for various needs. Unlike mortgages or auto loans, personal loans typically do not require a down payment. In this article, we’ll explain what personal loans are, discuss whether a down payment is needed, and provide tips for getting approved.
What is a Personal Loan?
A personal loan is a type of installment loan that can be used for almost any purpose other than purchasing a home or vehicle Common uses for personal loans include
- Debt consolidation
- Medical expenses
- Home improvements
- Major purchases
- Weddings
- Vacations
Personal loans provide access to a lump sum of cash upfront You then repay the loan in fixed monthly installments over a set repayment term, usually between 1-5 years. Interest accrues on the loan balance each month
Personal loans can be secured or unsecured:
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Secured loans require collateral like a savings account or certificate of deposit. If you default, the lender can seize the collateral.
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Unsecured loans don’t require collateral. They rely on your creditworthiness alone.
Do You Need a Down Payment for a Personal Loan?
The short answer is no – you do not need to provide a down payment to get approved for a personal loan.
Personal loans are a form of unsecured credit. The lender is not taking a security interest in any asset you own. Therefore, there is no requirement to make a down payment like there is with a mortgage or auto loan.
The lender will evaluate your application based on factors like your:
- Income and employment
- Credit score and history
- Existing debt obligations
- Assets and net worth
As long as you meet the lender’s eligibility criteria, no down payment is necessary. The full loan amount will be distributed to you upon approval.
How Are Personal Loans Different from Other Loans?
It’s helpful to understand how personal loans differ from other types of loans that do require down payments:
Mortgages
- Require 10-20% down payment
- Secured by the home
- Lower interest rates and longer terms
Auto Loans
- Often require 10-20% down
- Secured by the vehicle
- Enable purchashing a car
Personal Loans
- No down payment
- Unsecured
- Higher rates and shorter terms
- Flexible uses
While personal loans don’t offer the rock-bottom rates of mortgages and auto loans, they provide more flexibility in how you can use the funds since there is no collateral involved.
Tips for Getting Approved for a Personal Loan
Since personal loans don’t require down payments, getting approved is based more heavily on your qualifications as a borrower. Here are some tips that can help with getting approved:
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Maintain a good credit score. Striving for a score of at least 670 will unlock better rates and approval odds. Pay all bills on time and lower credit utilization.
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Keep existing debt low. Lenders will examine your debt-to-income ratio. Keeping debt below 30% of your income helps.
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Provide proof of steady income. Having stable employment and income sources reassures lenders you can repay.
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Use a co-signer if needed. Adding a co-signer with better credit can improve your chances.
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Borrow conservatively. Only apply for what you can comfortably afford to repay monthly.
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Compare lenders. Each lender has its own eligibility standards. Shopping around helps find the best match.
The Bottom Line
Personal loans provide quick access to financing that can be used flexibly, unlike mortgages and auto loans. A major benefit is that no down payment is required – the approval process centers on your creditworthiness and ability to repay. By maintaining good credit, steady income, and reasonable debt levels, you can get approved for a personal loan and receive the full amount upfront. Just be sure to only borrow what you can reasonably manage with your current budget and income.
Why Can’t I Use a Personal Loan as a Down Payment?
Conforming conventional loans, as well as FHA loans, do not allow homebuyers to use personal loans as down payments. Even if you find a lender and type of loan that doesnt explicitly forbid it, using a personal loan as a down payment may still not be an option. There are a couple reasons for this.
When applying for a mortgage, the lender will take a deep dive into your financial life and pay close attention to how your debt relates to your income. Theyll look at your recent pay stubs and pull your credit report to calculate what percentage of your gross monthly income goes toward debt payments—something known as your debt-to-income ratio (DTI). This involves looking at all recurring monthly debt payments, from credit cards to student loans to auto loans. Personal loans are on the table as well.
Mortgage lenders generally require a DTI thats less than 43% (or 36% for some lenders). Taking out a new personal loan to use as a down payment will nudge your DTI upwards, which will likely be a red flag to lenders. In some cases, it might increase your DTI enough to put you over the eligibility threshold and disqualify you as a mortgage borrower. It could also suggest that you may not be in the best financial position to buy a home. Either case makes it unlikely that a lender will accept a personal loan as a down payment.
Instead, lenders will want to see that youve got enough money available in your bank accounts to cover your down payment. All large deposits—including funds that come in from a personal loan—will need to be verified and substantiated.
Hold Off Until You Can Save More
Slowing down and taking some time to increase your savings could be all it takes to get approved for a mortgage. This begins with creating a realistic budget and making a spending plan that allows you to funnel extra income toward your down payment. Cash windfalls such as tax refunds, raises and work bonuses can also help you save more money with little effort.
Youll also want to use this time to improve your credit as much as possible before applying for a mortgage. Borrowers who have strong credit and steady income may qualify for a conventional loan with only 3% down.
The Pros and Cons of Personal Loans
FAQ
Do personal loans require down payments?
Do you have to pay upfront for a personal loan?
Is there a minimum down payment for personal loan?
What type of loan does not require a down payment?
Can you use a personal loan for a down payment?
Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac – which purchase mortgages from lenders, allowing lenders to provide mortgages to new home buyers – also don’t allow personal loans to be used for down payments.
Can you get a mortgage if you have no down payment?
In most cases, a lender won’t approve a mortgage application if you borrow money for your down payment. This is particularly likely if you’re using money from a personal loan. It’s wise to either seek a mortgage loan that requires a small down payment or no down payment, or hold off entirely until you can save up more.
Can I buy a house without a down payment?
USDA loans: If you purchase a rural or suburban home, you could use a USDA loan, which doesn’t require a down payment. You’ll have to pay for PMI and meet income and property eligibility requirements. VA Loans: If you or your spouse served in the military, you can look into a VA loan.
Do home loans require a down payment?
Certain home loans don’t require a down payment of any size, but you’ll still need to meet various requirements. VA loans – mortgages backed by the U.S. Department of Veterans Affairs (the VA) – don’t require putting any money down.