You’ve found the perfect home in the perfect price range, but now you need to get approved for the mortgage loan. It’s not an impossible task, but most lenders will require at least a 5% down payment as part of the approval process, which may be difficult to come up with if you haven’t been saving for years.
There are a few ways to come up with the money you need when you’re short on cash and need some quick. One way is a personal loan. But can these be used as a down payment for your mortgage? Here are the pros and cons.
Should You Use a Personal Loan as a Down Payment?
A down payment itself is supposed to be a gesture of good faith from you to the mortgage company that shows that you are fiscally responsible and have made an out-of-pocket contribution towards your home. Using a personal loan for your down payment, then, takes this act out of the picture, so many mortgage lenders prefer you not to go this route.
The source of the money you use for your down payment is required to be disclosed through financial records. Most lenders prefer that it have been in your account for a specified length of time. When you need a personal loan to make your down payment, the lender may question your ability to make the payments on your house.
Yet a personal cash loan isn’t out of the question completely. If your mortgage company will accept it and you have no other options, you may be able to find a small personal loan to give you enough for your down payment. The downside to this is that now, in addition to your mortgage payment, you’ll have a monthly installment payment for this second, smaller loan.
There are some pros to using a personal loan as your down payment. Although it’s not the preferred method, it’s still an option if you can afford the monthly payment on top of your mortgage. The good news is that these loans tend to be higher but shorter, so you should be able to pay it off quickly, and you can shop around for the best rates that you qualify for with your credit.
Don’t forget to consider the overall interest rate in addition to what your monthly payments will be. The higher the interest rate, the longer you may be paying two big payments for your home.
Another pro to a personal loan is that in addition to the down payment, you can secure the funding for your closing costs. This is usually another out-of-pocket expense, but if you are already borrowing for your down payment, it is usually simple to add on the amount needed for the required closing costs.
Don’t Let the Costs Turn You Away from Your Dream Home
Sometimes the perfect home falls in your lap and you don’t have time to save up thousands of dollars. You have to grab it before someone else does. Other times it’s just not feasible for you to save up for a down payment, or you weren’t expecting to be shopping for a home.
Whatever the reason, if you need a personal loan for your down payment, be sure the mortgage lender will approve it as a source of cash, then shop around for the best deals possible. If you can handle both payments for a short time, you can quickly find yourself in your new home!