Can You Use a Personal Loan to Buy a House?

Although you may sometimes be able to use a personal loan to buy a house instead of a mortgage, there are a lot of scenarios where it either wouldn't be allowed or wouldn't be the best financial choice. You also can't use a personal loan to get money for your down payment.

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

When Can You Use a Personal Loan to Buy a House?

Although a mortgage is the most common way to finance a home purchase, some homes don't qualify for one. The best time to use a personal loan is if:

• You're trying to finance a home that needs significant repair (for example, the roof can't be insured)

• You want to purchase a tiny or mobile home

• You want to buy open land

When You Can't Use a Personal Loan

A personal loan isn't the right choice if:

• You need to borrow more than $100,000. This is difficult to find and is reserved for people with the best credit history.

• You need a long repayment term. While mortgages can allow you up to 30 years to repay them, most personal loans expect repayment in five to seven years.

• You're trying to borrow money for your down payment. If you're trying to get a down payment together in order to qualify for a mortgage, you'll have to save up or be gifted the money by family. Borrowing money from a lender is not considered an acceptable income source.

It's also important to note that mortgages are a secured loan and personal loans are unsecured. Secured loans are tied to an asset that can be seized if payments can't be made. Because of this, secured loans often have lower interest rates than unsecured loans.

Can You Borrow Money for a Down Payment From Other Sources?

Mortgage lenders might let you use borrowed money from certain sources.

• Down payment assistance. State and county housing programs, and even some lenders, offer a second-mortgage loan you can use toward your down payment and/or closing costs. Most of these loans are forgiven after you've lived in the home for a certain length of time.

• 401(k) loan or early withdrawal. Although the IRS allows penalty-free hardship withdrawals from your 401(k) to buy a home, you'll pay income tax on the withdrawal and miss out on all the appreciation the withdrawn money would've earned over time. By borrowing money, you avoid the income tax and earn appreciation on funds you've repaid. The primary drawback of a 401(k) loan is that you'll have to repay it quickly if you separate from your employer. Failure to repay results in both income tax liability and a penalty.

The Bottom Line

In most cases, personal loans are best left to financing large expenses like home improvements or helping you tackle high interest credit card debt.

If you don't qualify for a mortgage, focus on improving your credit score, debt-to-income-ratio and saving up more money. You can also explore low- and no-down-payment conventional loans and loans backed by FHA, VA and USDA.

FAQs

Is it OK to use borrowed money to buy a house?

Yes, most people take out a mortgage loan to buy a home. However, you can't borrow money from a private lender for your down payment.

What kind of loans are allowed for down payments?

A forgivable loan from a down payment or closing cost assistance program is one. Your lender also might allow you to borrow against your 401(k).

Can I use a personal loan to buy land or a mobile home?

Yes, cash, land and mobile home purchase are among the many things you can use a personal loan for.

Can I get a personal loan after getting a mortgage?

Yes. If you have sound credit and enough income to meet the lender's requirements, but not until after you've closed on your mortgage loan.

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