A number of homebuyers struggle to have enough money for down payment and demands alternative funding. Is it wise to use a personal loan to fund your down payment for a house? If you intend to purchase a home, consider other alternatives such as FHA loan and other less costly loans instead of personal loans. Just because it is possible for you to take a loan to settle another debt does not mean it is a good thing to do.
There are some tough circumstances that may push someone to a corner when it comes to debts. The biggest challenge for most people is always affording the down payment. Generally, lenders demand 20% down or require clients to acquire private mortgage insurance, something that can be too expensive. In such conditions, a personal loan often seems the best way to meet the upfront cost. The question still remains: is it a nice idea, even if it is possible?
Is it possible to use a personal loan to settle a down payment?
You can be able to get a personal loan in some instances, though it is not easy. Even though lenders of personal loans do not dictate to you the way you should use the money, many mortgage entities do that. Usually, a number of these companies will critically look at all the inquiries on clients’ credit card report over a period of one year to ascertain that you have not taken a personal loan. Why would this be the case? Well, it is because taking a loan to settle another debt makes it very hard to manage your loan. Why do mortgage companies ask for a down payment? There is a reason for that. It indicates you are very stable financially to take such a huge amount of loan.
Reasons against the use of a personal loan
While your mortgage providers may permit the use of personal loans for down payments, it is important to reconsider it. The drawbacks often surpass the benefits.
• It lessens your credit score. Whenever you want to advance a loan, the lenders pull hard credit check, commonly referred to as the hard credit inquiry. Generally, a hard credit inquiry is reflected on the borrower’s credit report and in the first instance drops the credit score. A hard credit inquiry on your report is not good when you want to advance a loan. Having a lower score means that you cannot get competitive rates or better terms. Learn about this on A1 Credit
• It increases your debt-to-income ratio. Apart from depressing your credit score, advancing more loans implies that the debt-to-income ratio is higher. DTI is the ration between your monthly obligations and income. It is among the main things lenders consider when making lending decisions. The higher the ratio, the less likely the lender will agree to offer you better rates and terms. Most of the mortgage companies do not accept to work with individuals who have at least a 43% debt-to-income ratio.
• It means increased monthly payments. You will be left with less money to spend every month if you use a personal loan for mortgage down payment. In addition, you may risk damaging your credit score if you fail to pay the personal loan. Worse still, you fail completely to pay both your mortgage and personal loan, you may lose your home.
There are cases where a personal loan can be very helpful, especially if you have good credit and less monthly debt payments. Nevertheless, make sure your lender permits its use for down payment prior to your application. The following are circumstances under which taking a personal loan for a down payment may be a great idea:
• In a case where you expect cash inflow but you have to make an offer at the present. If you are expecting some money from a legal entitlement soonest, for instance, an inheritance, and you have received an offer on a home you dream of right now, it can be a wise thing. This is a situation that cannot actually wait. A personal loan may help to bridge the gap up to the time you will receive the monies.
• You are going for a job- a guaranteed thing rather than on a trial basis. If you have a very high paying job, for example, with airtight, and it is sensible to buy a home than making high rental payments in your new residential area. In this case, you can settle your personal loan while at the same time afford mortgage payments after beginning to work.
So far, it is evident that a personal loan may not be appropriate for getting a down payment, nevertheless, there are still other good alternatives to try out. You can consider the following funding alternatives:
• Look for a mortgage with a relatively lower down payment. Even though conventional mortgages carry at least a 20% down payment. Other mortgages hold different terms. The best examples include:
i. The Federal Housing Administration (FHA) at times require a down payment of only 3.5 %. Even though you will be obligated to Mortgage Insurance Premium, the overall costs may be significantly lower compared to typical personal loan repayments.
ii. The HomeReady Mortgage Program. The mortgage arrangement has a down payment of 3% only. Nevertheless, you will be required to take a homeownership education course in order to qualify.
iii. VA mortgages. This is a loan warranted by the US Department of Veterans Affairs (VA). With this option, you will not be required to make any down payment. It covers all the expenses of your home.
• Use the Down Payment Assistance arrangement, a provision available in many states. They provide grants that you can utilize to meet the down payment requirement.
• Advance loans and donations from friends and family members.
It may be possible to use personal loans to settle a debt. However, a good number of mortgage lenders may not allow you to use that option for good reasons. Even so, there are other options you can use. Do not hesitate to consider inexpensive alternatives at your disposal.