Buying a home is an exciting investment, but paying for the down payment can be a challenge. If your purchase includes a down payment, it's important that you pay the full amount — whether it's 3%, 20%, or somewhere in between — because it shows the lender that you are able to save money and are willing to put some “skin in the game”.
However, saving that much money can take some time. Due to that, many prospective buyers often look for shortcuts — a gift from a family member, use retirement savings, or take out a loan from your 401K account.
If these options are not available to you, you may have questioned whether you can take out a personal loan to fund your down payment. Although it is possible, we do not recommend it. Here’s why:
Borrowing your down payment shows the lender that you are not able to earn and save. It also suggests that you may not be ready for the sometimes unpredictable costs associated with owning and maintaining a home. While you are a homeowner, it will be very important to be able to save for the various maintenance costs that arise, saving for your down payment is good practice.
Your mortgage lender’s decision to lend you the money to buy your house is largely based on a calculation called a debt-to-income ratio. Generally, the total debt payments that you make monthly should be below 50% of the money your household earns.
Personal loans are unsecured — they have no asset backing them up — so they will carry a high interest rate. With this cost added to your debt-to-income ratio, taking out a personal loan may make you ineligible for more favorable mortgage terms.
Down Payment Tracing
Mortgage lenders want to know where your down payment money came from. As part of the underwriting process, they will look at your financial history for the previous year. If you’ve taken out a personal loan, which becomes part of your debt, it will show up here.
Down Payment Sourcing and Seasoning
Lenders will also look at how long the money for your down payment has been in your savings account. Lenders typically like to see that it has been there for at least two to three months to show that it hasn’t come from a recent undisclosed personal loan.
In today’s market, it makes more sense to look for a loan with a smaller down payment requirement than it does to borrow.
Consider a piggyback loan, also called an 80-10-10 or a simultaneous mortgage. You pay 10% as a down payment and take out two separate home loans, one mortgage for 10% and the other for the remaining 80% of the purchase price of the home, thereby allowing you to avoid paying mortgage insurance.
Lenders offer low down payment loans to qualified buyers, some as little as 3% of the home’s purchase price. FHA loans, VA loans, USDA loans, and loans for first responders and teachers are all excellent low down payment options for homebuyers.
Down Payment Assistance
There are more than 70 state and local programs in Minnesota that provide grants, matching funds, and low or no interest loans to homebuyers. You can learn about them and check whether or not you qualify for down payment assistance through many sources online.
Given the assortment of loan types available on the market, there shouldn’t be any reason to take out a personal loan for a down payment.
In fact, there are even some home loan options that require no money down at all. TCHFH Lending, Inc. provides a loan that not only allows borrowers to bypass the down payment altogether, it's set at a fixed, low-interest rate of only 3%.
Learn more about TCHFH Lending, Inc.'s unique mortgage product and whether or not it's the right home loan option for you.