Can You Use a Personal Loan for a Home Down Payment?
That lovely home, a landed double storey property at the heart of your ideal location. Pretty affordable too, about RM500,000.00 to be exact. Now, where do I get that RM50,000 for the down payment? It's a common obstacle we often face when it comes to buying a home, that dreaded down payment.
If you don't have a large enough down payment, you might start researching alternatives, such as using loans or gifts. But can you use a personal loan for a home down payment? Here's what you need to know.
Well, using a personal loan to finance your down payment isn't really a good idea. For one, using a personal loan actually defeats the purpose of the down payment contribution since the payment is supposed to show that you're investing some of your money. The glaring scenario that the lenders now see is that if you're able to afford the house if you can't afford the down payment.
However, it is still possible to obtain a personal loan for down payment if your mortgage lender agrees and you have hit the end of the road. A personal loan is a last resort option if you have exhausted all other alternatives. In addition to your monthly mortgage payments, you'll have to pay the lender principal and interest each month for a personal loan until you pay off the entire balance. Please do take note that monthly payments tend to be higher since it has a shorter period.
While we don't recommend taking out a personal loan, if your mortgage lender agrees to accept a personal loan as the source of your down payment, scout around for the best rate. Find the general interest rates that you qualify for, as well as the best options for your situation. Credit unions and online lenders generally offer better interest rates than traditional banks. Try to look for the lowest interest rate possible, because you'll need to pay your monthly mortgage bill as well.
Again, if you use a personal loan to pay for your down payment, make sure that you have enough money for closing costs. Technically a personal loan can cover both your down payment and closing costs, but this defeats the purpose of these payments and your debt-to-income ratio will likely increase. If you can't afford both the down payment and the closing costs, you should probably reconsider whether you should buy a house because you'll need to pay high monthly costs for the personal loan and mortgage.
Here's just a simple reminder of why we opine that taking a personal loan for the purpose of paying off that down payment isn't a good idea.
The Drawbacks of Personal Loans
Personal loans are unsecured debt, this simply means that there's no collateral for the bank to collect if you default on the loan. Lenders will charge much higher interest rates to make up for the fact that the loan is not backed by anything. Not only are interest rates high, there are plenty of other disadvantages to consider when taking out a personal loan:
? Defaulting with the addition of a personal loan if you're unprepared for the monthly costs.
? Increasing your debt-to-income ratio.
? Mortgage lenders may reject your loan request due to taking out a personal loan.
? High monthly payments with both a personal loan and mortgage.
? Lenders are less likely to grant you the mortgage amount you need.
? For each loan application, a hard credit pull is done. This lowers your credit score, making it more difficult to be approved for a loan.
So now that we have gone through the crux of this topic, hopefully this article has given you some useful information if you are looking to get a personal loan to fund your down payment.
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