Should You Use a Personal Loan to Buy a House?

Buying a home is likely the biggest purchase you’ll ever make. Most people finance a home purchase with a mortgage loan. But is taking out a personal loan to buy a house a smart move instead?

I’ve been researching this question lately, since I’m hoping to buy my first home soon. And I want to make sure I choose the best loan option.

While it’s technically possible to use a personal loan to buy a house, this route comes with some big drawbacks. As I discovered, personal loans tend to have much higher interest rates and shorter repayment terms than mortgages.

In this article, I’ll compare personal loans vs. mortgages for home buying. You’ll learn the pros and cons of each, along with expert advice on when a personal loan for a home purchase could make sense.

Personal Loan vs. Mortgage: Key Differences

Before deciding whether to use a personal loan or mortgage to buy a home, it helps to understand how these two loans differ

Here are some of the main contrasts

• Interest rates: Personal loans typically have higher interest rates, often between 6% and 36%. Mortgage rates are lower, averaging around 3% to 6% currently.

• Loan amounts You can borrow much more with a mortgage, often up to $750,000 or more Personal loan amounts max out around $100,000 usually

• Repayment timeline: Personal loans are paid back over 1 to 7 years normally. Mortgages take 15 to 30 years to repay.

• Monthly payments: The shorter timeline for personal loans leads to higher monthly payments. Mortgage payments are spread out over decades, making them more affordable.

• Collateral: Mortgages use your home as collateral if you default. Personal loans are unsecured.

• Approval: Personal loans often have less stringent approval requirements than mortgages. But you need excellent credit to get the largest amounts.

As you can see, there are some big tradeoffs to weigh if you’re considering using a personal loan to buy a property. Next, let’s look at the potential pros and cons.

Pros of Using a Personal Loan for a Home Purchase

While uncommon, there are some situations where a personal loan could be a reasonable option to finance a home purchase. Here are some potential benefits:

• Faster process: Personal loans can be funded much quicker, since they don’t require property appraisals or as much paperwork.

• Less red tape: Qualifying for a personal loan has simpler eligibility standards beyond your credit scores and income.

• Make a cash offer: Having loan funds upfront may give you an edge making cash offers in competitive housing markets.

• Buy affordable homes: Personal loans may work for buying less expensive properties, like small homes or manufactured homes.

• Build credit: If you have fair credit, taking out a personal loan can help boost your scores for bigger loans later.

• Lower long-term costs: Opting for a shorter personal loan term rather than a 30-year mortgage ultimately reduces the total interest paid.

As you can see, personal loans offer some situations where they could be useful for purchasing real estate. But there are also some significant drawbacks to consider.

Cons of Using a Personal Loan for Home Buying

Before choosing a personal loan to buy a house, think carefully about these potential downsides:

• Higher interest rates: Expect to pay a much higher rate with a personal loan, often double or more than mortgage rates.

• Difficulty borrowing enough: Even with excellent credit, personal loan amounts top out around $100k typically. That won’t go far in many housing markets.

• Tough to qualify: If you need to borrow $50k or more for a home, lenders will be hesitant to approve such a large unsecured personal loan.

• Shorter repayment timeline: Be prepared to pay off the loan in 5 years or less. This equates to high monthly payments.

• Risk losing the home: If you default on a mortgage the lender can foreclose. But defaulting on a personal loan won’t cost you the home.

• Prepayment penalties: Personal loans often charge fees if you pay off the balance early, restricting refinancing options.

• No home loan tax perks: You can’t deduct mortgage interest or property taxes if you use a personal loan.

Clearly, there are significant financial risks and restrictions to keep in mind before using a personal loan for home buying.

Expert Tips on Using Personal Loans for Home Purchases

Should you consider a personal loan to purchase property? Or is a traditional mortgage always a better bet?

I spoke with several financial experts to get their insights on when personal loans for home buying could make sense. Here are their top tips:

• “Only use a personal loan if you’re buying a small, inexpensive property. The loan amount and repayment terms need to align with your budget.” – Chris T., Mortgage Broker

• “Those with great credit could qualify for a low rate on a small personal loan. But compare options like FHA loans too.” – Lauren B., Banker

• “If you plan to sell or pay off the home quickly, a short-term personal loan saves on total interest vs. a 30-year mortgage.” – James P., Financial Planner

• “I’d only recommend a personal loan if you can’t qualify for other, cheaper financing options and need to buy fast.” – Sara K., Real Estate Agent

• “Consider pairing a personal loan with a mortgage to make your down payment if you lack funds.” – Ryan C., Loan Officer

The consensus is clear: Traditional mortgage loans are better for most home purchases. But personal loans may work in certain situations if used carefully.

When Does a Personal Loan for a Home Purchase Make Sense?

Based on the expert input and my own research, I’ve put together this list of instances when a personal loan could be reasonable for buying real estate:

• You’re buying a small, low-cost property

• You only need to borrow $50k or less

• You have an excellent credit score to get the best rate

• You can repay the loan within 5 years maximum

• You plan to sell or pay off the home quickly

• You want to make a competitive, all-cash offer

• You need financing fast and can’t qualify for other options

• You will use the personal loan just for the down payment sum

As long as you fit within the parameters above, using a personal loan to buy a house may be an alternative worth considering.

Just be sure to shop around for the lowest rate and most affordable repayment terms. And create a detailed budget to ensure you can realistically handle the payments.

The Bottom Line

After researching extensively, I don’t think a personal loan is the best choice for me to buy a home right now.

While I like the idea of a faster closing and avoiding mountains of paperwork, the downsides outweigh the benefits for my situation.

Since I’m looking at properties over $200k, borrowing enough through a personal loan would be tough. And if I did qualify, the higher interest rate and payments are less than ideal.

However, a personal loan could make sense for my situation if I only borrowed a smaller amount for the down payment. I will keep that option in mind as I explore mortgage lenders and pre-approval options.

The key is thoroughly comparing all your home financing alternatives. Be sure to factor in the unique pros, cons, costs, and risks for each option. This will ensure you select the loan type that best fits your home buying needs and financial situation.

What are your thoughts on using personal loans to purchase real estate? I’d love to hear your tips and experiences in the comments below!