By Ben LuthiCan You Buy a House With a Personal Loan?
Quick Answer
It's technically possible to use a personal loan to buy a home, but you may have a difficult time getting enough financing to cover the full purchase price.
Although you can use a personal loan to purchase a home, it's important to understand the limitations and other potential drawbacks.
If you're thinking about using a personal loan to buy property, here's what to know about how it works, the pros and cons and some alternatives to consider.
Can You Buy a House With a Personal Loan?
Yes, it's possible to buy a house with a personal loan. However, the most you can borrow with a personal loan is typically $100,000, and many lenders have lower limits. In contrast, the median home price in the U.S. is $349,225.
In other words, you'd likely only be able to borrow enough to purchase a tiny house or a mobile home. In fact, it can be difficult to find a traditional mortgage lender who will lend you money to finance a tiny house or a mobile home.
Instead of using a personal loan to buy a house, you may instead consider using one to improve your financial situation, such as by consolidating your debts. The on-time payments associated with a personal loan can also have the added benefit of improving your credit.
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Pros and Cons of Buying a Home With a Personal Loan
Before moving forward with a personal loan—or any type of loan for that matter—it's important to consider both the advantages and disadvantages it comes with. Here's what to keep in mind.
Pros
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No collateral requirement: Unlike mortgages, personal loans are typically unsecured, so you don't have to pledge the property as collateral. This can make the process simpler and less risky in terms of losing the home if you default.
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Faster funding: You'll typically have access to personal loan funds within a few days, which is much shorter than the 30- to 60-day timeline for the mortgage approval and underwriting process. This can help you act quickly in a competitive market or for a time-sensitive purchase.
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Flexibility: A personal loan offers more flexibility than a traditional mortgage, making it appealing for people looking to buy a tiny home, a mobile home or even land.
Cons
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Lower loan limits: Personal loans typically cap out at much lower amounts than mortgages, so they are not likely to cover the full cost of a home purchase, especially in high-cost areas.
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Higher interest rates: Personal loans often have higher interest rates than mortgages, even for borrowers with excellent credit, which can significantly increase the cost of borrowing.
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Shorter repayment terms: Personal loans usually come with shorter repayment periods, meaning higher monthly payments that can strain your budget compared to a traditional 15- or 30-year mortgage.
Alternative Ways to Pay for a House
If you're having a hard time finding what you need to finance a home, there are plenty of other options that can make it easier to achieve your goal. Here are just a few to consider:
- First-time homebuyer loan programs: If it's your first time buying a home, you may be able to obtain a conventional loan with a down payment as low as 3%. Additionally, VA loans guaranteed by the Department of Veterans Affairs and USDA loans guaranteed by the U.S. Department of Agriculture don't require a down payment at all; they aren't available to all borrowers, however.
- Down payment assistance: Some government agencies, community organizations and even lenders offer down payment assistance, sometimes even for repeat buyers. This may come in the form of a grant, a forgivable loan, a deferred-payment loan, a low-interest loan or a matched savings program.
- Gift funds: Lenders typically allow you to use gift funds from family members and others as part of your down payment.
- Cosigner: If your credit or income makes it difficult to get approved for a traditional mortgage on your own, consider asking a trusted person with great credit and a stable income to cosign your loan application. Just make sure they understand their obligations before signing the dotted line.
- Save up: While it may not be ideal, saving up for a down payment can be the best financial choice in the long run. Set a goal and a timeline based on your budget, and do what you can to stick to it. This can also give you some time to work on improving your credit if necessary.
Frequently Asked Questions
Check Your Credit Before Applying for a Loan
Regardless of which loan you're planning to use to buy your home, it's important to make sure your credit is in good enough shape to qualify for favorable terms. Check your credit score to know where you stand, and look for any areas you might need to address before you apply.
You may be able to qualify for a loan with a relatively low credit score, but the higher your score, the better your chances of getting a lower interest rate. As with any loan, make sure you shop around and compare several lenders to ensure you get the best rate available.
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About the author
Ben Luthi
Ben Luthi has worked in financial planning, banking and auto finance, and writes about all aspects of money. His work has appeared in Time, Success, USA Today, Credit Karma, NerdWallet, Wirecutter and more.
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