Key learning points
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Personal loan amounts range from €2,000 to €100,000, which may not be enough to buy a regular house, but could work if you need a small mortgage for a small house or mobile home.
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The interest on a personal loan is not tax deductible, like with a mortgage.
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With a personal loan you can usually obtain financing faster than with a mortgage.
With average home sales prices approaching $400,000 by the end of 2023, a personal loan typically won’t give you the borrowing power you need to buy a home compared to a regular mortgage. However, if you are looking for a tiny home or a manufactured home, a personal loan may be a good financing choice. If not, a personal loan can help you get your finances in order so you can qualify for a mortgage to buy your dream home.
Can you use a personal loan to buy a house?
Yes, if you can find a home at a price within the standard personal loan amount limits (typically between $2,000 and $100,000) and you can afford the payment term. That’s probably not enough to buy a regular home, but it could be perfect if you need a small mortgage for a tiny house or a mobile home.
Using a personal loan to buy a small house
Personal loans can be the right financing for purchasing small homes with prices averaging between $30,000 and $70,000. Mortgage lenders often shy away from loans under €100,000 because they are not profitable. In other cases, small homes do not meet minimum real estate requirements. For example, small homes are typically less than 400 square feet, which is less than the Federal Housing Administration minimum.
Personal loans are typically unsecured, meaning you don’t risk losing your home if you can’t make the payments. A disadvantage of a loan compared to a mortgage is that you cannot write off the interest on a personal loan, because it is not tax deductible like mortgage interest.
Using a personal loan to finance a manufactured home
On average, you’ll pay between $86,100 and $158,633 to buy a manufactured home, which means you can use a personal loan to buy one at the lower end of the price range. If you don’t plan on tying your home to the land you own, you may not be able to get mortgage financing, making personal loans a good option.
A personal loan can also be cheaper than a chattel loan, an expensive form of financing used to buy mobile homes that are not considered real estate.
6 Ways You Can Use a Personal Loan to Buy a Home
If you’re buying a standard family home, you can use a personal loan to spruce up your finances so you can qualify for a home loan.
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If you’re saddled with multiple credit card payments at high interest rates, you can use a personal debt consolidation loan to combine them all into one monthly payment. Rates are typically lower than credit cards and you lower your credit utilization ratio, which has a major impact on your credit score.
As your scores improve, lower monthly payments can help you qualify for a higher sales price or a better interest rate. Having fewer monthly payments reduces the chance of a late payment, which can seriously harm your credit score. -
You need a credit score of 780 or higher to get the best mortgage interest rates with the lowest closing costs. You could see a big boost to your credit score if you pay off maxed out credit cards with a debt consolidation loan.
In addition to qualifying for a more expensive home, a lower interest rate can save you thousands of dollars in interest charges over the life of a 30-year mortgage. -
If you took out a short-term (12 to 36 months) car loan to buy a new car, the payment will affect your debt-to-income ratio (DTI), which measures how much total debt you have compared to your income . . The higher your DTI ratio, the lower the mortgage amount you can qualify for.
If you’ve found your forever home but have been told your mortgage’s DTI ratio is too high, consider replacing your short-term auto loan with a longer-term personal loan. Keep in mind that you will ultimately pay more interest if you choose a longer loan term than the loan you are repaying. -
If you don’t have enough saved for a down payment on a house, consider putting the savings from steps one and two above into a down payment savings account. The more you put down, the lower your monthly mortgage payments will be. If you can make a 20% down payment, you can avoid monthly mortgage insurance on a conventional mortgage.
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Mortgage underwriting guidelines do not allow you to use money from an unsecured loan, such as a credit card or personal loan, for your down payment or closing costs to buy a home. However, there is an exception if your loan is secured by an asset such as a car.
Mortgage lenders will allow you to use money from a secured personal loan to qualify if you meet the DTI ratio requirements on the new payment. You will also need to submit paperwork to prove you own the asset and document the asset’s value with a third-party service (such as Kelly Blue Book for a car loan). -
If you are trying to buy a home in a competitive market, your real estate agent may recommend an all-cash offer, which may require offering more than the asking price for the home. If you don’t have enough money to make an offer and need extra cash quickly, a personal loan may be worth considering.
Many personal loan lenders can get you cash in a day or two, keeping you in the race against other cash buyers. If you want to pay off the personal loan once you buy the house, borrow the money against the equity in your home with a mortgage loan, HELOC, or a cash-out refinance.
Pros and cons of using a personal loan to buy a house
Positives
- Replace multiple debts with one easy-to-remember monthly payment.
- Improve your credit scores by paying off revolving credit card debt.
- No assets are required as collateral.
- Faster financing times than most mortgage products.
- Can use the debt consolidation savings to build a down payment fund.
Cons
- Payment can affect your DTI ratio.
- The rates are often higher than mortgage rates and HELOC rates.
- Shorter terms mean higher monthly payments than home equity products.
- Possible prepayment penalties and high origination fees.
- The interest on a personal loan is not tax deductible when purchasing a house.
Can you use a personal loan for a down payment?
The answer is definitely no if it is an unsecured personal loan. However, as mentioned above, if the personal loan is secured by an asset such as a car, collectible, artwork, or other asset, lenders will usually allow the money borrowed to count toward your down payment. You must qualify for the additional payment and prove ownership of the secured asset.
