Can I get a personal loan to buy a house?

With median home sale prices approaching $400,000 at the end of 2023, a personal loan typically won’t give you the borrowing power you need to buy a home compared to a regular mortgage, However, if you’re in the market for a tiny home or a manufactured home, a personal loan may be a great financing choice. If not, a personal loan can help you tidy up your finances so you can qualify for a mortgage to buy your dream home.

Can you use a personal loan to buy a house?

Yes, if you can find a home at a price within standard personal loan amount limits (typically between $2,000 and $100,000) and can afford the payment timeline. That’s probably not enough to buy a regular home, but it may be perfect if you need a small mortgage for a tiny home or a mobile home.

Using a personal loan to buy a tiny home

Personal loans may be the right financing fit to buy tiny homes with prices averaging between $30,000 and $70,000. Mortgage lenders often shy away from loans below $100,000 because they aren’t profitable. In other cases, tiny homes don’t fit minimum property requirements. For example, tiny homes are typically less than 400 square feet, which is less than the Federal Housing Administration’s minimum.

Personal loans are typically unsecured, which means you won’t risk losing your home if you can’t make the payments. One disadvantage of a loan versus a mortgage is you can’t write off personal loan interest because it’s not tax-deductible like mortgage interest.

Using a personal loan to finance a manufactured home

On average, you’ll pay between $86,100 and $158,633 to buy a manufactured home, which means you could use a personal loan to buy one on the lower end of the price range. If you don’t plan to attach your home to land that you own, you may not be able to get mortgage financing, which makes personal loans a good option.

A personal loan may also be cheaper than a chattel loan, an expensive type of financing used to buy mobile homes that aren’t considered real estate.

6 ways you can use a personal loan to buy a house

If you’re buying a standard family home, you can use a personal loan to spruce up your finances to help you qualify for a home loan.

• 1. Pay off high-interest-rate credit cards with a debt consolidation loan

  If you’re saddled with multiple credit card payments at high interest rates, you can use a personal loan for debt consolidation to combine them all into one monthly payment. Rates are typically lower than credit cards, and you’ll reduce your credit utilization ratio, which has a major impact on your credit score.
  
  
  If your scores improve, lower monthly payments could help you qualify for a higher sales price or a better interest rate. Having fewer monthly payments reduces the chances of a late payment, which can really damage your credit score.

• 2. Get a better mortgage rate or lower closing costs

  You’ll need a credit score of 780 or higher to get the best mortgage interest rates with the lowest closing costs. You could see a big boost to your credit score if you pay off maxed-out credit cards with a debt consolidation loan.
  
  
  Besides allowing you to qualify for a higher-priced house, a lower interest rate can save you thousands of dollars in interest charges over the life of a 30-year mortgage.

• 3. Improve your debt-to-income ratio by paying high-payment installment loans

  If you took out an auto loan with a short term (12 to 36 months) to buy a new car, the payment will affect your debt-to-income (DTI) ratio, which measures how much total debt you have compared to your income. The higher your DTI ratio, the lower the mortgage amount you can qualify for.
  
  
  If you’ve found your forever home but have been told your mortgage DTI ratio is too high, consider replacing your short-term auto loan with a longer-term personal loan. Keep in mind that you’ll end up paying more in interest if you choose a longer loan term than the loan you’re paying off.

• 4. Add monthly savings to a down payment fund

  If you don’t have enough saved up for a down payment for a house, consider putting the savings from steps one and two above into a down payment savings account. The more you put down, the lower your monthly mortgage payment will be.  If you can swing a 20% down payment, you’ll avoid monthly mortgage insurance on a conventional mortgage.

• 5. Get a secured personal loan to use toward your down payment

  Mortgage underwriting guidelines don’t allow you to use money from an unsecured loan like a credit card or personal loan toward your down payment or closing cost requirement to buy a home. However, there is an exception if your loan is secured to an asset like a car.
  
  
  Mortgage lenders will allow you to use funds from a secured personal loan to qualify if you meet the DTI ratio requirements with the new payment.  You’ll also need to provide paperwork to prove you own the asset and document the value of the asset with some third-party service (like Kelly Blue Book for a car loan).

• 6. Fast extra money for an all-cash home purchase

  If you’re trying to buy a home in a competitive market, your agent may recommend an all-cash offer, which may involve bidding more than the asking price on the home. If you’re short of funds to make an offer and need a quick path to extra cash, a personal loan may be worth a look.
  
  
  Many personal loan lenders can get you cash within a day or two, which keeps you in the running against other cash buyers. If you want to pay the personal loan off once you’ve purchased the home, you borrow the funds against your home’s equity with a home equity loan, HELOC or a cash-out refinance.

Pros and cons of using a personal loan to buy a house

Pros

• Replace multiple debts with one easy-to-remember monthly payment.
• Improve your credit scores by paying off revolving credit card debt.
• No assets are required for collateral.
• Faster funding times than most mortgage products.
• Can use debt consolidation savings to build a down payment fund.

Cons

• Payment may affect your DTI ratio.
• Rates are often higher than home equity loan and HELOC rates.
• Shorter terms mean higher monthly payments than home equity products.
• Potential prepayment penalties and high origination fees.
• Personal loan interest isn’t tax-deductible for a home purchase.

Can you use a personal loan for a down payment?

The answer is a definite no if it’s an unsecured personal loan. However, as mentioned above, if the personal loan is secured by an asset like a car, collectible, artwork or other asset, then lenders will usually allow the borrowed funds to count toward your down payment. You’ll need to qualify with the extra payment and prove you own the secured asset.