Is It Possible To Buy A House With A Personal Loan?
Can you use a personal loan to buy a house? The answer is maybe. It’ll depend on the lender and a multitude of other factors. Keep reading to learn more about the situations where taking this type of loan for buying a home might be an option, the associated risks, benefits, and possible alternatives.
Once you’re armed with the right information, you’ll be empowered to make the right choice for your financial situation.
Is Using A Personal Loan To Pay For A House A Good Idea?
Typically, mortgage lenders don’t allow individuals to use these types of loans when buying a house. When you place a down payment on a home, you’re meant to show that you’re investing some of the money you’ve saved into your new home purchase. Although, when a personal loan is used for that purpose, the point becomes moot. Lenders will wonder if you’re capable of repayments and may view you as a riskier borrower.
If you need to use a loan as a down payment on your home, you’ve probably arrived at this option as a last resort. Regardless, it’s possible the lender will allow you to use the loan if you have no other alternatives available to you.
When you use a personal loan to buy a house, you’ll be subjected to monthly interest payments, the monthly loan balance, as well as your monthly mortgage payments. That’s a lot of financial responsibility to manage. Moreover, personal loans for properties will usually have a shorter repayment period than a mortgage, so your money-saving solution might only be temporary.
The Impact Of A Personal Loan On Your Credit Score
Every loan poses a potential risk to your credit score. When you have late or missed payments, your rating is lowered. The lower your score, the less likely you’re to be deemed a responsible borrower. Why does this matter? Ratings aren’t only for loans. They also matter when you want to rent a house, lease a car, and so forth.
When you apply for this specific type of loan, the lender will run a hard inquiry on your report. This process tends to lower your score by a few points but usually won’t have lasting effects.
Disadvantages Of Using A Personal Loan To Buy A House
While these loans can assist you in securing the funds you need quickly; there are some disadvantages you should be aware of. These include:
- When the lender checks your credit history, your score will probably be lowered, which in turn makes it more difficult to get loan approval
- You’re facing high monthly payments when you take on both a mortgage and a personal loan
- You may have more of a tough time gaining access to the mortgage amount you need
- It’s possible that by receiving this lending product, you’ll be unable to find a mortgage lender to work with you
- Taking out this type of financing to buy a home will increase your debt-to-income ratio
- These loans are a type of unsecured debt. Since there’s no collateral, you might be subjected to higher interest rates
Home Loan Or Personal Loan: Which Is Better?
In order to choose the best option, you’ll need to consider the following:
- A home loan, or mortgage, is a type of secured loan which uses your home as collateral. A personal lending product requires no collateral
- With a home loan, you face the risk of foreclosure
- Tax breaks might be available for your home loan, though this isn’t an option with personal loans
- Home loans tend to have tenures lasting up to 30 years, while personal loans are subjected to quick repayment times that span one to five years
- Home loans tend to offer low-interest rates, while personal lending products are known to have high interest rates
Personal Loan Alternatives
If you’re unsure whether or not this type of financing is right for you, look into the following alternatives:
- FHA loans: A federal housing administration (FHA) loan is a mortgage that’s insured by FHA and supplied by an FHA approved lender
- VA loans: If you served in the military, this option can help you secure a mortgage. These loans are issued by private lenders and backed by the U.S. Department of Veterans Affairs
- USDA loans: If a zero down payment mortgage sounds ideal, check out this lending product. It’s for rural and suburban homebuyers
- Alternative lenders: Try asking a family member or friend to lend you money
- Conventional loans: This type of home loan isn’t backed by a government agency
When you’re thinking about taking a personal loan to buy a house, be sure to do your homework, consider risks, and explore alternatives before settling on using this option.
Remember that only under the appropriate conditions you should use this type of loan to purchase your dream home.