Should You Use a Personal Loan to Buy a Real Estate Property?
Typically, personal loans aren’t used to purchase a house. Although it can be useful for a variety of things, a personal loan isn’t necessarily the best funding option for real estate property. However, there are exemptions in some instances where it’s not only doable, but it may be a fitter option than a mortgage loan.
Using a Personal Loan to Buy a House
Getting a mortgage is your best bet if you want to buy a standard single-family home. But, if you wish to use a personal loan, know it that it has higher interest rates and shorter repayment terms than mortgage loans, which make it a poor choice in that matter.
On the flip side, if you plan to buy a mobile home or a very small home whose cost is significantly lower, a personal loan may be a suitable option. It owes to the fact that looking for a traditional mortgage lender to grant you a fund for a mobile or tiny home is difficult.
Some lenders even market personal loans for financing mobile or small housing properties. However, if you go this route, it will be considered as a cash offer. It means you can’t use the home as loan collateral. And since the sale isn’t contingent on a mortgage process, the seller may be more willing to select you.
Can You Use a Personal Loan for a Down Payment?
If you are going to purchase a traditional home and standard mortgage, the required down payment typically ranges from 3% to 20%, depending on the situation and the lender.
Although it’s tempting to use a personal loan to cover it, it will be hard for you to convince the mortgage lender to accept it. The reason being is that a personal loan can leverage your DTI (Debt-to-Income Ratio), which can affect your odds of getting approved.
Further, a high DTI could be a sign that you’re not capable of managing your finances well, mortgage lenders consider it as a red flag.
Some of the well-known permissible uses for a personal loan include starting a business, an earnest money deposit, consolidating debt, financing a large expense, renovating your home, and paying medical expenses.
Alternative Options to Pay for a House
If you find it hard to finance a home, you can resort to other options such as loans, grants, and programs that will make it easier to achieve your home goal.
For instance, if you buy a home in a rural area or you’re a veteran, you can apply for a loan to the U.S. Department of Agriculture or the U.S. Department of Veterans Affairs. The Federal Housing Administration offers loans with a 3.5% down payment, while some conventional mortgage lenders may accept down payments as low as 3%.
You may qualify for a grant from the nonprofit National Homebuyers Fund if your income is considered low or moderate. This grant is worth 5% of your loan amount to assist you in covering the down payment. And the best thing is you never have to repay it. You can also check if there are available down payment assistance programs within your state.
How a Personal Loan Affects Your Credit Score
Obtaining a personal loan to purchase a mobile home or a small house might be a good option, but it’s important that you understand how it will affect your credit.
Applying for any type of credit, in general, can shave off a few points from your credit score only when the lender runs a so-called hard inquiry on your credit profile. As such, standard inquiries don’t have a permanent impact on your scores.
A personal loan can only affect your credit score through your behavior on managing monthly payments. If you pay your bills promptly, it will boost your credit scores. On the contrary, defaulting on the loan or missing a payment can take a toll on your credit, regardless if you get to keep the house.
To stay on track with the payments, consider using automatic payment systems. Some lenders even give discounts on the interest rate if you do it. You can also set up monthly alerts to remind you of the due date of your payment.
Check Your Credit Before Applying for a Loan
It’s crucial to make sure your credit is healthy to qualify for favorable terms, no matter what loan you’re planning to apply for. Moreover, check your credit score to look for any areas you might need to address and to know where you stand before you apply.
It’s also possible for you to qualify for a loan with a low credit score. But if you have a better credit score, you have higher chances of getting a loan with a lower interest rate. Just like any other loan, be sure to do some thorough shopping and compare lenders to make sure you get the best rate. Credit Ninja Financing is a good place to start with.
Takeaway
Using a personal loan to buy a property isn’t really the best way to utilise it because doing so defeats the purpose of the down payment contribution. The payment is supposedly for showing that you’re investing your money and not the other way around.
But then again, if the mortgage lender agrees and you have no other options, it’s possible to get a personal loan to finance your home goal.
Author Bio:
Tiffany Wagner
Tiffany Wagner is a seasoned freelance writer whose expertise lies in finance and real estate. She’s also an active advocate for financial literacy and tours across the country to promote the cause whenever she has the time. When not working Tiffany binges on her favourite tv series on Netflix.
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