The mortgage and interest rates currently prevent average earners from purchasing a dream home. Hence, “Can you use a personal loan to buy a house?” becomes highly relevant. The straightforward answer is “Yes”; you can use a personal loan to buy a house. however, there are pitfalls.
Our master capitalists give you several alternatives and better home financing options. Plus, do you take fixed-rate or variable-rate personal loans?
In-depth Discussion on Purchasing a House Using Personal Loan
Here, we discuss every point of this matter.
What is a Personal Loan
A personal loan is a versatile financial tool typically offered by banks, credit unions, or online lenders. It can address various personal and financial needs of yours. Notably, it is an unsecured form of borrowing. It means you need no provision of collateral, such as property deeds or vehicle titles.
However, the approval of a personal loan relies on several factors, including your creditworthiness, your existing relationship with the lending institution, your history of repaying previous loans, your ability to meet repayment obligations, etc.
So, if your credit score is high and you have a nice history of paying back loans, the institute will provide you with a personal loan fast. Learn the personal loan approval process.
Advantages of Personal Loan
Below is a comprehensive list.
- Personal loans are adaptable and fulfil your requirements. Say you plan to travel to Europe, which will cost you $13,000. Personal loans help that despite your small monthly income.
- As they do not require collateral like real estate or vehicles, personal loans involve fewer formalities, less paperwork, and reduced administrative requirements, streamlining the borrowing process.
- Personal loans are typically a swift financial product, with funds disbursed within a few business days, making them suitable for urgent financial needs. For instance, you have your destination wedding next week and need $20,000. You should get that sum on time.
- These loans often come with fixed-rate interest terms, ensuring your monthly payments remain consistent and predictable. For instance, if the interest rate during the loaning time is 8%, it will be the same for the whole period.
- Personal loans can streamline debts. So borrowers can manage and reduce high-interest debts more efficiently. For example, resolve a loan of 12% interest using a personal loan with only 7-9% interest.
Buying a House by Using a Personal Loan
You can buy a house, but it is not a good idea. The reason is that specialized home-purchase mortgage loans have fewer discounts than personal loans. So why should you avoid a personal loan to buy a house? Let’s check out two reasons for that. Plus, learn how to refinance a personal loan.
Down Payment Issue
Down payment is your top priority. A large personal loan may cover your accommodation needs. But it is not as straightforward as you might think.
The down payment ranges from 3%-20% of the purchase price for a typical single-family home purchase. So, if the house’s value is $600,000, its 20% is about $120,000. On average, you can get a maximum of $100,000 as a personal loan.
Logically, you must select a low-priced house or convince the seller to make a lower down payment. Two factors become crucial.
- 01: You will have a small house that might not meet your family’s space requirement. So, in the long run, it is worthless. Also, the house’s resale value will be less promising.
- 02: You may the house by convincing the seller of a lower down payment. But it will increase your monthly payments with higher interest rates.
Issues with Debt-to-Income Ratio
Typically, most financial institutions disregard a personal loan as a down payment for a house. It involves high risks for them. Furthermore, a personal loan can potentially elevate your debt-to-income ratio (DTI). Hence, the seller will probably not sell the house to you as you will use a personal loan for the down payment.
To figure out DTI, divide your monthly income by the monthly bills. A lower number is better. A personal loan will amplify this number. It is a telltale sign of your economic hardships. Can you see the real picture?
Pros & Cons of Using Personal Loan to Buy a House
Below is the comparison.
| Pros | Cons |
| Your home is no collateral. | High-interest rates. |
| Opportunity to save money. | Insignificant amount to pay for the downpayment of a standard house. |
| Use it to make a business deal for a house-selling business. | Hard to manage due to the short repayment term. |
Our Expert Loan Suggestion for Home Purchase
If you are considering borrowing money to purchase a home, it may appear that the source of those funds matters little. Technically, you can use a personal loan for this purpose, but we strongly recommend against it as it could complicate your financial outlook.
Superficially, personal loans might seem a more versatile option. Unlike mortgage loans, personal loans have no specific usage restrictions, allowing you to allocate the funds as needed. However, personal loans have several flaws when used for home purchases.
Personal loans generally carry higher interest rates, shorter repayment terms, and smaller loan amounts than mortgage loans. Consequently, you will pay a larger monthly payment due to the higher interest rates and shorter loan durations.
To avoid potential financial strain, our strong recommendation is to choose a mortgage loan instead. It will adequately finance your home with more favorable terms for this purpose. So you have better financial stability to buy your home.
Final Words
While it is technically possible, using a personal loan to buy a house is not advisable due to higher interest rates, shorter terms, and potential financial stress. So can you use a personal loan to buy a house? We hope our expert home-buying guide will help you make the right decision.
A mortgage loan for real estate purchases makes more sense and is a more manageable choice for aspiring homeowners.