Can You Use a Personal Loan to Cover a Mortgage Down Payment?

Owning a home is a dream for many individuals and families, as it often represents a milestone of financial achievement. Having a property to call your own also offers a strategy for building wealth over time, but this potential wealth comes with many responsibilities.

In order to get into the home you want, your finances need to be in good shape, including having assets on hand to help with the expenses of purchasing a home. While countless lenders offer mortgage options to prospective buyers, a mortgage itself is a big financial commitment. Many homeowners owe on their property for three decades, and the monthly payment that comes with a mortgage can be a strain in some cases.

To help reduce the total cost of owning a home on a monthly basis, many buyers start with the down payment amount. A mortgage down payment can help reduce your monthly mortgage bill for the duration of your home loan, but coming up with the cash to put down a sizable mortgage down payment isn’t always an easy task. That’s because the combination of a mortgage down payment, closing costs, and moving expenses can add up to a significant amount. In these cases, some buyers may look to lenders for help covering the burden with a personal loan.

What’s the Benefit In A Large Mortgage Down Payment?
Having the ability to contribute a mortgage down payment of a higher amount has several benefits, including the following:

·        Lenders see you as a lower risk because you are investing your own assets in the home purchase.

·        You may receive a lower interest rate with a higher mortgage down payment.

·        Your monthly payments are lower because the total amount financed is less.

·        You may avoid costly extras such as private mortgage insurance if you put down a higher mortgage down payment.

·        The repayment term may be reduced if you contribute more toward a down payment.

While these benefits can be incredibly helpful for your home ownership experience and the cost involved, you also have to consider the caveats. A large down payment for a mortgage means you are using up available cash to invest in your home. If you do not have enough surplus after the down payment for an emergency fund, an unexpected expense could mean you need to take on other debt in the future. Additionally, saving up for a significant mortgage down payment isn’t an easy task for most prospective home buyers. This is where you may consider a personal loan to help.

Should You Consider a Personal Loan?

When you don’t have enough saved up for a large down payment on a home purchase, you may think about using a personal loan to cover the difference. A personal loan is an installment loan disbursed in a lump sum with a fixed repayment term of anywhere from one to seven years or more.

Taking on debt to take out a mortgage may sound counter intuitive, but there are valid reasons.

By virtue of a larger down payment, You may be able to lower your mortgage interest rate or reduce your monthly payment moving forward. With that in mind, you need to consider the dollar amount and repayment length associated with mortgages. Any reduction in interest can amount to a considerable sum by the end of repayment. Taking out a short-term loan to make that happen may be worth the associated short-term expense.

Of course, while a personal loan may be helpful, it may also be harmful.

In addition to your new mortgage, you will also owe money to your personal loan lender. While this amount is far smaller than your mortgage obligation, it can still be a burden, especially for a new homeowner looking to make improvements to the house. Additionally, personal loan interest rates typcically range from the mid-single digits to as high as 36 percent, which are higher than typical mortgage rates.

In addition to these drawbacks, some mortgage lenders may not to allow it. Mortgage lenders pay close attention to your debt-to-income ratio when considering your application, so taking on a personal loan may negatively impact this metric. With a higher debt-to-income ratio, you may be less likely to get approved for the lowest possible interest rate and the best terms for your home loan.

The Bottom Line

If you want to make a large mortgage down payment to reap the rewards mentioned above, but you don’t have the savings set aside to do so, a personal loan may be a last-resort solution. However, before considering or pursuing a personal loan, it is crucial to speak with your mortgage lender to see how this will impact your mortgage application. They may not allow it, and if they do, you may be charged a higher interest rate on your home loan because of it.

A personal loan may be justified if it helps you achieve your goals with a new home loan, including having a lower total cost for a mortgage or avoiding private mortgage insurance. You should look to your other resources first, including savings, investment accounts, and even gifts from others if your mortgage lender allows. Be sure to consider the debt you’re taking on if a personal loan is the route you take, and have a plan for paying both this debt and your monthly mortgage payment before making a final decision.    
By Andrew from LendEDU, a consumer education website and personal finance resource"